Wal-Mart is waging a different fight against irrational liquor laws in the Fifth Circuit that offers alternatives to Byrd. (With links to 5th Circ. Briefs)

A fundamental tenet of the of fairness under the Constitution is that the States cannot discriminate in commerce between out-of-state players and in-state players. This is the recent marching cry taken to the Supreme Court in the Byrd case. There’s a lesser known burden that restricts laws impacting interstate commerce which holds that even if a law may not fully discriminate as between out-of-state and in-state players on its face, if it “incidentally” burdens interstate commerce, it can be unconstitutional and stricken under the Commerce Clause.

These issues are the subject of a heated argument underway in the Fifth Circuit brought by the Texas Alcoholic Beverage Commission against Wal-Mart in an appeal from a District Court win by Wal-Mart which invalidated a Texas ban on the types of liquor stores that publicly traded companies could own in Texas.

Wal-Mart won at the District Court level in proving that the end effect of a few Texas statutes that banned public corporations from obtaining liquor permits were burdened commerce and had a discriminatory impact and that they were specifically adopted by the Texas legislature with the intent of keeping out-of-state companies like Wal-Mart (Wal-Mart was a specific company cited in the legislative record as the type of company the legislature was looking to keep out of the Texas liquor business) from holding licenses for liquor sales and competing with Texan owned businesses.

In a 50 page opinion detailing many findings of fact and conclusions of law regarding the history of the implementation of the ban as well as the purpose behind the ban and its attendant effects on out-of-state businesses, the District Court dismantled the State’s justifications and arguments finding that they either lacked evidentiary support, weren’t borne out by the evidence when the intended effect was compared to the actual effect, and were just plain dishonest when it came to stating what the State was looking to accomplish by enacting the bar to public company participation. The 50 page opinion from Judge Pitman can be read here.

The opinion is worth the work as, again, we see in this method of approaching restrictive State statutes regarding liquor laws that involves taking the matter to a full trial with evidence, there is little escape for States when their pet theories about the intended effects of their laws are subjected to even the simplest rational basis analysis. Invariably, economic evidence and statistical data does not support State theories for discriminatory conduct or irrational laws governing advertising or market participation as laws premised on unproven foundations – the “just-so” stories of State legislators – such as reducing consumption, limiting sales, forestalling access to alcohol and the like. Moreover, taking a matter through the full ambit of fact-finding and trial allows challengers to do away with State arguments such as the ones raised here, for example, that “public corporations – large corporations – would be less accountable and compliant than small businesses.” Adducing evidence puts these matters to rest in a way that simply losing or winning an injunction and immediately appealing the decision does not. A finding of fact on such matters helps preclude an appellate review that might just decide to accept these kinds of stories and arguments because they “make sense.”

Here, unlike a direct challenge to an out-of-state vs. in-state discriminatory ban on economic actors, the Court undertook the additional analysis in agreeing that a law may be non-discriminatory on its face, but have an insidious impact against fair-play in interstate commerce:

Here… the challenged statutes serve a legitimate local purpose. But the public corporation ban is also “uniquely anti-competitive,” creates “a significant barrier to market entry,” and, thus, imposes a “severe” burden on interstate commerce. … [T]he public corporation ban outright blocks from the market the vast majority of potential out-of-state entrants. … Moreover,… whatever benefits the public corporation ban may have can be achieved using alternative, more narrowly tailored regulatory tools. … (“A statute need not be perfectly tailored to survive Pike balancing, but it must be reasonably tailored.”). Ultimately, the Court concludes that if it were to uphold the protectionist scheme created by the ban and allow Texas to bar the vast majority of potential out-of-state entrants into the Texas liquor market “it would jeopardize what the dormant Commerce Clause aims to preserve: ‘a national [free] market for competition undisturbed by preferential advantages conferred by [individual states] upon [their] residents or resident competitors.” … (quoting General Motors Corp. v. Tracy, 519 U.S. 278, 299 (1997)) (modifications in original).

In sum, the public corporation ban imposes a severe burden on interstate commerce. While the statute has some putative benefits, those benefits can be easily and more directly achieved through a variety of alternative regulatory measures. Accordingly, the Court concludes that burdens the ban places on interstate commerce are clearly excessive relative to its local benefits.

In looking to the failure of a statute under a form of rational basis review, the Court noted that the “just-so” stories for justifying the law proposed by States shouldn’t be blindly accepted:

Rational basis review is a highly deferential inquiry, but it is nonetheless a fact intensive one. The Fifth Circuit’s opinion in St. Joseph Abbey v. Castille, 712 F.3d 215 (5th Cir. 2013), is instructive. In St. Joseph Abbey, the court struck down a Louisiana law requiring that caskets be sold only by licensed funeral directors at licensed funeral homes. Id. The Fifth Circuit explained that “although rational basis review places no affirmative evidentiary burden on the government, plaintiffs may nonetheless negate a seemingly plausible basis for the law by adducing evidence of irrationality.” Id. at 223. The court counseled that under rational basis review the examination of the fit between a law and its purported purposes should not proceed in abstraction but rather should be “informed by the setting and history of the challenged rule.” Id. The St. Joseph Abbey panel framed “the pivotal inquiry” as “whether there is a rational basis . . . that can . . . be articulated and is not plainly refuted by the [plaintiffs] on the record compiled by the district court at trial.” Id.

A powerful reminder that States need support for laws. The opinion also has some other nuggets worth considering.

Of the many important points raised in the decision, it’s worth noting the following:

The Court found that there were less restrictive means to achieving the age-old and much touted “goal” of reducing liquor consumption than the public corporation ban. This is important because it is an argument that time and again States default to in attempting to justify exclusionary and discriminatory practices in liquor legislation that discriminates or treats parties unfairly:

Next, the Court finds that however substantial the state’s interest in reducing the availability and consumption of liquor may be, the weight of the evidence demonstrates that this interest can be achieved through alternative means with less impact on interstate commerce. On this point, there is hardly any dispute. The record consistently indicates that any effects the public corporation ban has on the price, availability, or consumption of liquor could be more easily and more directly achieved through other regulatory measures, including the imposition of excise taxes (that raise the price of liquor) or the use of manner-of-sales regulations (that control where and how liquor can be sold). See supra Section VIII. The available evidence suggests that excise taxes are the most common and most efficacious policy tool for minimizing externalities associated with liquor consumption. Id. In fact, all five experts testified at trial that excise taxes are an effective method of discouraging the consumption of liquor. Id. Indeed, TPSA concedes that a variety of “direct controls” are available to Texas to reduce liquor consumption (including, for example, “quotas or hard permit caps”), and that among the available options, “a proven method of reducing consumption is to increase excise taxes.” TPSA Trial Br., Dkt. 314, at 18. Thus, the record leaves little room to doubt that if Texas desired to manage the price, availability, and consumption of liquor without burdening interstate commerce, it could easily do so. And Pike compels the Court to account for the availability of these alternative measures in weighing the benefits and burdens of the challenged statutes.

The Court recognized that a law might be drafted in a facially non-discriminatory fashion, but could have the ultimate effect (a test and finding found by the First Circuit in Family Winemakers of California v. Jenkins) of discriminating in commerce between out-of-state and in-state players:

While the law did not expressly differentiate between in-state and out-of-state wineries, the court found discriminatory effect, because it “significantly alter[ed] the terms of competition between in-state and out-of-state wineries to the detriment of the out-of-state wineries that produce 98 percent of the countries wine.” Id. at 11. While the law did not outright bar any winery from distributing in Massachusetts, the court concluded that its “ultimate effect” was to “artificially limit the playing field in [the] market in a way that enables Massachusetts’s wineries to gain market share against their-out-state competitors.” Id.

Backed by the lobbying group that represents current Texan owned liquor stores under the regime banning public corporations, the State has appealed to the Fifth Circuit and briefing is underway.

Here are links to some of the Fifth Circuit Briefs:

Texas WalMart Liquor License 5th Circuit Brief Appellant Opening.

Texas WalMart Liquor License 5th Circuit Brief Appellant.

Texas WalMart Liquor License 5th Circuit Brief Appellant Response Brief.

Texas WalMart Liquor License 5th Circuit Brief Appellant Excerpts.

Texas WalMart Liquor License 5th Circuit Brief NBWA Amicus Brief.

Texas WalMart Liquor License 5th Circuit Brief Record Excerpts.

Texas WalMart Liquor License 5th Circuit Brief Wholesalers Amicus.

Texas WalMart Liquor License 5th Circuit Brief Retailers Amicus.

Texas WalMart Liquor License 5th Circuit Brief Wal-Mart Response to Various Amicus.

Texas WalMart Liquor License 5th Circuit Brief Wal-Mart Response.