A blow to three-tiers. 7th Circuit sides with expansion of Granholm – allowing lawsuit challenging Illinois’s ban on direct shipping of liquor, beer, and spirits from out-of-state retailers.

“The Amendment gives states the power to structure their liquor distribution systems; it does not give states that adopt one structure over another outsized deference.” Judge Wood writing in Lebamoff v. Rauner regarding the function of the Twenty-First Amendment and its intersection with the three-tiered system.

In Bourbon Empire, Reid Mitenbuler pointed out that the three-tiered system was a decent post depression boon to states looking to achieve a windfall of funds through taxes by creating an unnecessary middle-man with the end effect of harming consumers by increasing prices. He postulated that these laws had seen their time. And when viewed in light of the Supreme Court’s recent Wayfair ruling expanding the ability of states to impose taxes on out of state internet retailers, perhaps we are simply marching toward a booming economy in alcohol shipments.

Many who currently get their beer, whiskey and wine online care little for whether they’re doing it legally. The same goes for those shipping into states where the practice is prohibited. Most hide their heads in the sand banking on the idea that a state would likely send a letter demanding the retailer cease shipments before looking to take action against the retailer for the illegal, sometimes criminal, activity. But that’s much akin to the Napster music downloading craze of the late 90’s and early 2000’s. The answer to stopping the practice wasn’t enforcement of practically unenforceable copyright laws, it only took legitimate and easy systems for online purchasing and streaming services to bring consumers back to paying for their music. Once access was readily available, people stopped looking to go the unlawful (and non-sales-taxed) route.

The same holds here. All states need to do is implement systems for out of state retailers – and manufacturers – to engage in online sales and shipping, and allow for the easy reporting of those sales and the payment of the state sales tax, and the problem of not achieving sales tax – and even an excise tax – on those items would dissipate. States could collect that revenue and consumers would have access to greater choice and potentially lower prices.

Seriously, don’t you want to be able to order any wine, spirits, or beer, you might want online? Have it shipped to you? Have access to the panoply of choice rather than needing to be in a certain state or region to obtain something because it isn’t carried by your local merchants? You should be asking yourself – why am I not able to do this? Why isn’t ordering my favorite beer as easy as logging in to Amazon?

Well, consistent with prior applications, it appears that the commerce clause ala Bacchus Imports v. Dias, Brown-Forman v. New York and Granholm v. Heald, may be just the mechanism to help bring alcohol purchasing into the 21st century.

The 7th Circuit Court of Appeals just helped push the momentum for rational thought toward control a step closer to consumer freedom. The case, Lebamoff v. Rauner, involves a challenge to an Illinois law that allows in-state alcoholic beverage retailers to ship directly to Illinois consumers in the state but forbids out-of-state retailers from shipping to Illinois consumers. Seems simple, right? The commerce clause restricts treating out-of-state businesses differently than in-state businesses based on their status as out-of-state or in-state businesses.

Well the argument that states make against applying the commerce clause in these situations (ala Byrd v. Tennessee) is basically that since Granholm didn’t specifically say that its holding applied to wholesalers and retailers as well as manufacturers, the 21st Amendment should allow states to discriminate at those layers of the system. (Spoilers, the 7th Circuit just rejected this argument, eloquently.)

In this case, some Indiana retailers and an Illinois consumer challenged the statute – Illinois mandate that “any alcoholic liquor from a point outside this State to a person in this State who does not hold a manufacturer’s, distributor’s, importing distributor’s, or non-resident dealer’s license issued by the Liquor Control Commission.” 235 ILCS 5/6-29.1(b).

A federal district court refused to consider the issues simply holding that the matter was one of the legitimacy of the three-tiered system and dismissed the case. Everyone except the state of Illinois apparently understood that was wrong, and the plaintiffs appealed to the 7th Circuit.

The 7th Circuit corrected this error by reversing the district court and remanding the case for further proceedings. Importantly, the court recognized that the types of discriminatory statutes base on alcohol regulation like Illinois’s ban on in-state vs. out-of-state retailers shipping alcohol to Illinois citizens are bound by a developing rule in commerce clause and 21st Amendment jurisprudence through cases that “dictate that the Twenty-first Amendment can save an otherwise discriminatory regulation only if it is demonstrably justified by a valid factor unrelated to economic protectionism.”

The 7th Circuit noted the discriminatory effect the law had – point out that “[b]y allowing statewide shipments, Illinois has signaled that it is not quite so concerned about face-to-face sales. At the same time, it has made its retailer licenses attractive to out-of-state businesses while barring those businesses from obtaining a license solely on the basis of state residency.”

Before reversing and remanding the Court considered the second part to an alcohol related commerce clause violating statute – “whether the interests implicated by a state regulation are so closely related to the powers reserved by the Twenty-first Amendment that the regulation may prevail, notwithstanding that its requirements directly conflict with express federal policies.” Byrd, 883 F.3d at 614 (quoting Bacchus, 468 U.S. at 275–76). The Court noted that the language from the Illinois statute that prohibited interstate shipments said two things, that the statue protected the health of the citizens and the economy of the state. The Court went on to note that the former may be a reasonable Twenty-first Amendment grounds for discrimination (if proven through evidence as we’ve seen recently in the 8th Circuit and in the 5th Circuit) but the latter “smacks of protectionism” ultimately finding that the plaintiffs’ complaint should not have been dismissed and remanding the case for further proceedings and the development of the record, thereby rectifying the wrong done against the commerce clause.

Hopefully now, the plaintiffs will line up their experts and proceed to a full trial to show that the law does not accomplish the “health” “safety” or any other justifications put forth by the state that do not “smack of protectionism” and the district court will find that it is improper to allow in-state statewide deliveries by in-state retailers while denying the privilege to out-of-state retailers.

Two asides to note from this opinion:

1. Importantly, don’t think the 7th Circuit shied away from the argument that befuddled the Second Circuit in Arnold’s Wines regarding wholesalers and the middle-tier. They absolutely didn’t, in fact, they all but pointed out that a state might not be able to enforce purchasing by out-of-state retailers through in-state distributors and wholesalers:

Illinois argues that any factual development is a fool’s errand, because lifting the in-state presence requirement and out-of-state shipment ban would not give the plaintiffs any real relief. The reason this is so, according to the state, is that it would be impossible for a hypothetical out-of-state licensed retailer to comply with other aspects of the regulatory scheme. In particular, it says, as long as Illinois is entitled to insist that retailers authorized to sell in Illinois must buy all their stock from Illinois wholesalers, the out-of-state retailers would gain exactly nothing by winning this suit. They would simply be blocked from the market at a different stage. The Second Circuit found a similar practical impossibility argument persuasive when addressing a similar New York law. Arnold’s Wines, 571 F.3d at 192 n.3. But just as we part from the Second Circuit’s analysis of Granholm as limited to producers, we do the same on this point. First, the legality of those restrictions is contestable, as the Supreme Court’s grant of review in Tennessee Wines illustrates. Second, it is not clear that the other regulatory hurdles facing out-of-state retailers favor the state’s position. If Illinois can limit the dangers of mail-order sales through other requirements, why does it need to discriminate against interstate commerce and flatly bar out-of-state retailers from obtaining a license?

2. It’s also worth noting that the 7th Circuit chimed in on the Circuit split in a manner that those regarding Byrd and the Supreme Court’s upcoming decision may find reassuring as it was thoughtful and well reasoned and researched in addressing the limitations, or lack thereof, on the application of the Granholm decision, pointing out that the Supreme Court decisions Granholm cited and relied upon were not limited to the producer tier (nor to any tiers, in particular as one even discussed discrimination vis-a-vis in-state vs out-of-state consumers) and ruled in favor of a rational application of the commerce clause against discrimination in alcohol trade:

A strict limitation of the Commerce Clause to the producer tier is difficult to square with Healy and Brown-Forman, both of which the Court read as helping to establish the “nondiscrimination principle of the Commerce Clause” with respect to state regulation of alcohol. Granholm, 544 U.S. at 487. Healy involved importers and shippers, not just producers, 491 U.S. at 327–31, and Brown-Forman states that “[e]conomic protectionism is not limited to attempts to convey advantages on local merchants; it may include attempts to give local consumers an advantage over consumers in other States.” 476 U.S. at 580. Read together, Healy, Brown-Forman, and Granholm actually contradict a producers-only rule. “A fair reading of this passage leads to one conclusion: the Supreme Court discussed the relationship between the dormant Commerce Clause and the Twenty-first Amendment in the context of ‘producers’ simply because Granholm involved statutes addressing that step in the three-tier system.” Byrd, 883 F.3d at 621.