Court finds state’s prohibition on exclusive liquor distribution agreements for out-of-state distillers violates Commerce Clause so state eliminates exclusivity.

Out-of-state spirits producers do not enjoy the same rights as in-state producers in Minnesota when it comes to exclusive distribution agreements. Under Minn. Stat. § 340A.307 out-of-state distillers and importers (those bringing spirits into Minnesota) of intoxicating liquors “must offer for sale on an equal basis to all licensed wholesalers and manufacturers all intoxicating liquor brought into the state of Minnesota.” This right means that out-of-state distillers or importers cannot enter into exclusive arrangements with wholesalers and must sell their liquor to any wholesaler that wants to purchase it. Minnesota statutes do not apply this same openness to in-state produced spirits. In-state distillers, rectifiers, blenders, etc., are allowed to enter into restrictive agreements with wholesalers giving them exclusive rights to their spirits; this allows them to establish the exclusive territories so common to the beer wine and spirits distributing world.

Souther Glazer’s, rightfully, thought this restriction was a Commerce Clause violation, and the State of Minnesota agreed and the parties were set to stipulate that the act emplacing this restriction was unconstitutional but some in-state distributors and manufacturers realized this right benefited them and intervened to contest Southern’s assertions that this form of differential treatment between in-state and out-of-state liquor manufacturers and importers amounted to discrimintatoin in violation of the dormant Commerce Clause of the U.S. Constitution. The District Court rejected their contention and found in favor of Southern, holding that the disparate treatment between in-state and out-of-state spirits manufacturers and importers violated the Commerce Clause, but stayed entry of its judgment for 60 days based on representations from the parties that the Minnesota State Legislature was considering an amendment to the law to correct the Constitutional problems. You can read the opinion in this case, Southern Glazer’s Wine & Spirits v. Harrington here.

Some important points from the District Court in this matter that are good reminders about some general matters that pop up in many alcohol related Commerce Clause cases:

1. The intervenors had challenged Southern Glazer’s standing in this matter as a wholesaler when the language of the Coleman Act regulated the interests of liquor importers and distillers and not spirits distributors. The Court rejected the argument that a wholesaler’s interests were not impacted by the law:

“Though Intervenors are correct that the Coleman Act regulates out-of-state liquor producers and that Southern is not directly regulated, the Court finds that Southern has standing because  its interest in exercising its exclusive distribution contracts with out-of-state producers is firmly within the zone of interests under the dormant Commerce Clause. Hazeltine, 340 F.3d at 592 (finding that loss of business as a result of a challenged statute satisfied the injury-in-fact requirement); Ben Oehrleins, 115 F.3d at 1379 (finding sufficient injury-in-fact where county ordinance prohibited plaintiffs from gaining access to a market).”

2. The intervenors argued that given the amount of time that had passed since the law’s enactment, the constitutional claims were barred by the statute of limitations. The Court found that continuing harm obviated the statute of limitations claims:

“[A] ‘ constitutional claim can become time-barred just as any other claim can[.]” United States v. Clintwood Elkhorn Mining Co., 553 U.S. 1, 9 (2008) (quoting Block v. North Dakota, 461 U.S. 273, 293 (1983)). However, continuing violations of law, which inflict continuing and accumulating harm, can provide relief from a statute of limitation’s effects. Hanover Shoe, Inc. v. United Shoe Mach. Corp., 392 U.S. 481, 502 n.15 (1968) (“We are not dealing with a violation which, if it occurs at all, must occur within some specific and limited time span. . . . Rather, we are dealing with conduct which constituted a continuing violation of the Sherman Act and which inflicted continuing and accumulating harm[.]”); Montin v. Est. of Johnson, 636 F.3d 409, 416 (8th Cir. 2011) (“[Plaintiff] appears to allege, however, that he suffers daily and unconstitutional restrictions of his liberty of movement . . . . His claim, therefore, may be akin to a prisoner’s Eighth Amendment claim or claims involving repeated enforcement of policies against a plaintiff rather than claims alleging merely ongoing consequences from an older, challenged action.”).

Here, Southern alleges that the Coleman Act’s allegedly discriminatory provisions produce a continual harm. Southern’s claims therefore rest on continual violations resulting in an inability to enforce otherwise valid provisions of its contracts. The inapplicability of statutes of limitations to on-going and continuous harm is clearly established and Intervenors’ statute of limitations defense does not raise issue of material fact sufficient to preclude Rule 12 relief.

3. There is a movement after the 8th Circuit’s opinion in Sarasota Wine Market v. Schmitt, to view the holding of Tennessee Wine as something more expansive than just holding that the Twenty-First Amendment allows states to enact measures “appropriate to address the public health and safety effects of alcohol use and [] serve other legitimate interests” to one that also allows states to enact Commerce Clause violating “licensing requirements and restrictions that are “essential” components of a three-tiered system.” This statement goes beyond the holding in Tennessee Wine, that case had one holding about health and safety, it did not have a second ruling about licensing laws that are a part of the three-tiered system.

Those of you keeping track may want to note this as it will likely be cited by others and you’ll want to know the origin of such a statement and why/how it is an incorrect citation to Tennessee Wine. It is not a holding from Tennessee Wine. Off-handed dicta is cited. What’s going on here is that the court is mixing 8th Circuit precedent with Supreme Court precedent in a portmanteau of a rule that really relies on the oft-cited and improperly attributed dicta about the legitimacy of the three-tiered system that we see in so many cases. You can read our treatment of this “unquestionably legitimate” language in our writing on Sarasota Wine here along with a discussion of the tenuous nature of that statement and the cases ultimately cited for the proposition.

The holding in this Minnesota Case shows how the application of this *NEW* criteria comes into play:

Here, the Coleman Act does not attempt to even-handedly regulate any form of Minnesota’s three-tiered structure like the licensure requirements in Sarasota. Similarly, assuming that the Coleman Act was intended to reduce prices, as Intervenors assert, the law is not analogous to the residency requirement at issue in Southern Wine and Spirits that was intended to promote social responsibility and temperance. 731 F.3d at 811. Instead, the Coleman Act attempts to regulate the manner in which out-of-state producers offer their products while protecting in-state interests from the same requirements. In this light, the Coleman Act is more akin to Tennessee Wine & Spirits as a law that is “ill suited to promote responsible sales and consumption practices” when “there are obvious alternatives that better serve that goal without discriminating against nonresidents.” 139 S. Ct. at 2474, 2476. As Intervenors acknowledge while arguing that the Coleman Act is severable, there are a plethora of alternatives to discriminating against out-of-state producers and products-most easily by requiring all producers and products to be subject to open wholesaling and prohibited from exclusive distributorships. Indeed, current proposed legislation in both the Minnesota Senate and House of Representatives provides this exact remedy. Compare S.F. 3008, 92nd Leg., First Engrossment and H.F. 2767, 92nd Leg, As Introduced, with Minn. Stat. § 340A.307, subds. 1, 4.

In sum, the Coleman Act facially discriminates against out-of-state producers and products, is not an essential element of Minnesota’s three-tiered system, and is ill suited to serve valid regulatory interests when non-discriminatory alternatives that better serve such goals exist. Accordingly, the Court finds that the Coleman Act’s open-wholesaling requirement and prohibition against exclusive distributorships is unconstitutional.

4. Also interesting about the opinion from the District Court in this case is that it doesn’t even blink in referencing an entirely likely out-dated Eighth Circuit residency case regarding a Missouri law that required wholesalers be residents of the state: Southern Wine and Spirits of Am., Inc., v. Div. of Alcohol and Tobacco Control, 731 F.3d 799 (8th Cir. 2013) It is hard to see how the residency requirement of that case can be considered constitutional in light of Tennessee Wine. But given the halting pace of courts properly extending the Supreme Court’s Commerce Clause jurisprudence to its logical conclusion in 21st Amendment alcohol related cases we will likely need someone to bring that exact challenge to Missouri’s residency requirements for liquor wholesaler’s again just to have courts acknowledge it is in conflict with Tennessee Wine.

5. The Court’s outline of the three different forms of Commerce Clause discrimination is a good summary of where we stand in Twenty-First Amendment related cases:

The Supreme Court recognizes three forms of discrimination against out-of-state interests. First, a state law may have an impermissible discriminatory purpose. Bacchus Imports, 468 U.S. at 270. Second, a law may facially discriminate against out-of-state Cooper v. Tex. Alcoholic Beverage Comm’n, 820 F.3d 730, 743 (5th  Cir. 2016)(distinctions between in-state and out-of-state retailers and wholesalers are permissible “if they are an inherent aspect of the three-tier system.”); Wine Country Gift Baskets.com v. Steen, 612 F.3d 809, 818 (5thCir. 2010) (“[D]iscrimination that would be questionable, then, is that which is not inherent in the three-tier system itself.”); Brooks v. Vassar, 462 F.3d 341, 352 (4th Cir. 2006) (noting that challenging the requirement that out-of-state retailers sell through Virginia’s three-tier system “is nothing different than an argument challenging the three tier system itself.”). interests. Chem. Waste Mgmt. v. Hunt, 504 U.S. 334, 342 (1992). Third and lastly, a law may have a discriminatory effect. Maine v. Taylor, 477 U.S. 131, 148 n. 19 (1986).

Author’s Update: As the district court opinion noted, the ruling to strike this statute had been stayed while the Minnesota legislature undertook to change to statute to remove the commerce clause violation. It turns out that the in-state distribution interests and retailer interests promoting competition and open sales won out, so the statute is being amended to make in-state manufacturer’s bound by the act as well. So in-state distillers in Minnesota will not be allowed to discriminate in sales and cannot enter into exclusive arrangements.

You can track that Senate Bill 3008 in the Minnesota Legislature here.