Indiana’s prohibition of joint beer/spirits distribution upheld but did the court leave open the ability to try a different challenge?

An Indiana federal district court has ruled that Indiana’s law prohibiting a delivery company owned by the same owners of a beer wholesaler from having a contract with an unrelated spirits wholesaler to pick up and deliver its spirits is not preempted by the Federal  Aviation Administration Authorization Act of 1994 (FAAAA), which prohibits states from enacting or enforcing policies “related to a price, route, or service of any motor carrier.”

We’ve got the analysis below and a discussion of some ways this case could potentially have been argued differently, and – spoilers – someone’s been improperly citing the vanity publication date of Toward Liquor Control again…

A bit of background:

Indiana has a quirky little prohibition in its liquor laws that keeps distributors of beer from distributing liquor. One of Indiana’s biggest beer distributors has been fighting the good fight attempting to circumvent/end/constitutionally challenge this prohibition in the courts for years… with little success.

We wrote about one of these challenges last year where the 7th Circuit held that increasing price to consumers was a “rational basis” on which Indiana could support the law keeping beer and liquor wholesalers separate. In that piece we went on to show that Indiana’s laws don’t actually increase pricing.

Also, since that opinion, more than a few courts have come to realize that three-tiered regulation cannot claim to be reasonably tailored to foster temperance as laws prohibiting underage drinking and programs to increase abuse awareness have a greater effect on temperance and are more narrowly tailored to achieve that goal. To be sure – that doesn’t stop some states (and courts) from making the argument or citing that rationale in an opinion.

What happened in the present case:

The present case in Indiana – E.F. Transit v. Cook et al., had already gone up on appeal to the 7th Circuit once and was remanded as the 7th Circuit reversed a finding that the issues raised were not ripe for determination.

On remand, in the present challenge, the shipping company, which shares common ownership with a beer distributor, wanted to deliver the liquor of a spirits distributor – simply acting as the courier/delivery service for the business. The delivery company owns the warehouse that the beer distributor leases space in.

The delivery company had already received a letter ruling regarding warehousing liquor for the separately owned and unaffiliated liquor distributor from the Indiana Alcohol and Tobacco Commission – which said the beer distributor that shared owners with the delivery company would have an interest in a liquor distributor if a liquor distributor warehoused and allowed the delivery company to ship its liquor.

The argument is that such an interest is prohibited by Indiana law as Indiana maintains a three-tiered system separating alcohol manufacturers, distributors (wholesalers), and retailers. Indiana law mandates that “a wholesaler cannot hold an interest in both a beer and liquor permit and vice versa.” (From the opinion citing Ind. Code. § 7.1-5-9-3(b) and also noting that a person prohibited under the Indiana liquor licensing statutes from doing a certain act or holding an interest “directly” is also prohibited from doing that act or holding that interest indirectly. Ind. Code § 7.1-1-2-5.)

The delivery company didn’t give up after the regulators wouldn’t let it warehouse the spirits wholesaler’s product and proposed a different setup where it would simply be the courier/deliverer for the spirits wholesaler’s alcohol – but wouldn’t warehouse the liquor distributor’s spirits to retailers.

The Indiana Alcohol and Tobacco Commission wouldn’t provide guidance:

The delivery company again sought review of this new arrangement and approval/disapproval from the Commission for this system, but the Commission refused to either approve or disapprove of the activity (but warned that it had “some concerns about prohibited interests.”) Given this somewhat foreboding comment, the liquor distributor withdrew from the deal.

The delivery company brought suit challenging the law.

The opinion against the delivery company:

The argument addressed by this recent opinion from the federal district court is the prohibition of beer distributors having an ownership in a liquor distributor is  preempted by the Federal Aviation Administration Authorization Act of 1994 (FAAAA), which prohibits states from enacting or enforcing policies “related to a price, route, or service of any motor carrier.”

You can download and read the opinion the district court wrote here.

In the ruling the court rejected the deliver company’s argument regarding preemption noting first that the recent Indiana Supreme Court case of Indiana Alcohol & Tobacco Comm’n v. Spirited Sales LLC involving related parties found that the same delivery company could not own a spirits wholesaler because the delivery company had the same ownership as the beer distributor.

The opinion from the district court in this case went on to find that the FAAAA was at odds with the beer/spirits distributorship prohibition and that normally the FAAAA would preempt such a law, but that in this case, the Twenty-first Amendment saved the prohibition as the restriction on ownership between beer and spirits distributors is within the “core powers” granted under the Amendment. (Under this “core powers” notion, states can regulate the times, places, and manner under which liquor may be imported and sold.) – Note: this doctrine hasn’t fared well when assessed against the dormant commerce clause.

Citing to a more recent 7th Circuit decision which held that the FAAAA did not preempt an Indiana law that prohibited motor carriers from delivering wine to consumers based on the same “core powers” doctrine, the court here rejected the preemption argument also holding that horizontal “undue influence” as regulated by the statute helped preserve the “three-tiered” system.

The state again advanced a rationale for its liquor laws that is adequately covered by other laws and should potentially be preempted on other grounds:

As we’ve seen in other arguments by states looking to uphold their quirky liquor regulations (most recently in the brief filed by the states as amicus in the Byrd case), the state of Indiana advanced the argument that the statute in question promotes the following state interests:

• (1) ensuring there is a stable marketplace at the retail level;
• (2) temperance;
• (3) encouraging competition among diverse wholesalers;
• (4) controlling the size of organizations to prevent undue influence on the system and regulators; and
• 5) discouraging monopolistic business models.

Apparently the delivery company took the stance that the State had to prove that the statute actually advanced these interests rather than taking the laboring oar (the one we’ve seen be successful in many cases) by showing and proving (having witnesses/experts to testify) that these interests are not advanced by the statute (or at the least that there are less restrictive and burdensome methods for achieving them).

Here’s the problem. No one asked the court to directly address whether the activity proposed by the delivery company really created an interest, direct or indirect. The Court looked to the Spirited Sales case and to dicta from the 7th Circuit in this case, without allowing and assessing a factual record showing that picking up and dropping off liquor to customers doesn’t create the kind of “interest’ the statute prohibits. There’s no mention of such an argument or the attempt to create a question of fact about what “interests” were created in the opinion. And as we’ve seen time and again, States fare worse in challenges to nonsensical alcohol laws when trials occur as they’re ill equipped to meet the burdens of proof for even rational basis standards (not because they’re not good at trials) because the laws were never passed based on evidence, testimony, or a rational basis to begin with. Most alcohol laws are premised on non-scientific social essay postulations from over a hundred years ago (looking at you Toward Liquor Control) or worse, on the prejudices and whims of legislators caught up in the fervor of Prohibition’s legacy.

So the Court upheld the statute and found there was no preemption. Finding that the prohibited interest statutes like the one in question. Also, justifications 1, 3, 4, and 5 above are all the purview of regular antitrust principles and laws and perhaps those laws should be argued to preempt the state laws if the goals the state is looking to achieve are really antitrust concerns. – And they certainly are as it’s the justification advance for the final two pages of the court’s opinion.

Perhaps another challenge now that the state’s been forced to disclose its rationale and we’re free to challenge their assertions?And one last thing because I can’t let academic dishonesty go: for those out there looking for a bit of honesty in their writing, this opinion (likely because one of the briefs did it) cites to that apostate vanity-published screedfrom 1933 – Toward Liquor Control with the vanity reprint publication date citation of 2011. Let me be clear, this book is not a scientific publication. It is not founded on research, or experimentation or testing, it is an un-researched non-scientific puff-piece created to support the three-tiered movement at the repeal of the failed national experiment of Prohibition – it’s close to 100 years old and its false premises lack any foundation in reality.