1st Circuit closes ranks with those Circuits reading Tennessee Wine as requiring States prove alcohol laws discriminating against out-of-state interests affect health or safety goals or other legitimate interests

The Circuits are by and large falling into line regarding the implications and procedures of Tennessee Wine when Dormant Commerce Clause challenges are brought against State alcohol-related laws and regulations. They are rejecting the notion that a summary dismissal of challenges is acceptable and requiring a fact-finding assessment involving evidence greater than conclusory assertions made by “experts” regarding the health and safety effects of laws and regulations. Governments need to present evidence showing that their statutes create the stated effects, and those challenging statutes are able to present evidence to rebut those assertions. Once a plausible complaint alleges a lack of connection or support for the assertions that a law fosters health and safety results, the burden of proof seems to rest with the regulators to show that kind of impact or causal link.

The recent wine retailer shipping case of Anvar v. Dwyer decision from the First Circuit reiterates the standards. Briefly, in this case (as with all the others) out-of-state wine retailers challenged a Rhode Island law allowing in-state brick and mortar retailers to sell and deliver directly to Rhode Islanders without allowing out-of-state retailers with no presence in the state the same privileges and also challenged the lack of a “Common Carrier” allowance for getting the wines to customers (i.e., deliveries by the wine stores are allowed, but they cannot use FedEx or UPS to do it) arguing that it creates a discriminatory impact as out-of-state retailers, even if allowed to “deliver” would not be able to do so given their distance from the state. The retailers lost at the District Court level and the 1st Circuit notes that the Court failed to consider “concrete evidence” in making its determinations that the Rhode Island requirements were necessary to the three-tiered system “and thus promote the health and safety of Rhode Islanders.” The out-of-state wine retailers appealed the decision arguing the District Court should have considered evidence under the Tennessee Wine precedent.

The 1st Circuit agreed that more legal lifting is required than accepting assertions of health and safety impact. Here’s how the 1st Circuit set up the principles and analysis required where the Dormant Commerce Clause and the 21st Amendment run together a la Tennessee Wine:

“It follows, we think, that when assessing whether a state’s law regulating alcohol runs headlong into the dormant Commerce Clause, a court first must determine whether the challenged law discriminates — either on its face, in effect, or in purpose — against interstate commerce. See Or. Waste Sys., Inc., 511 U.S. at 99; Fam. Winemakers of Cal., 592 F.3d at 9-10, 13. If it does, the inquiry then shifts to whether the challenged law “serve[s] a State’s legitimate [section] 2 interests” such as addressing “the public health and safety effects of alcohol use.” Tenn. Wine, 139 S. Ct. at 2469, 2474. To prove as much, the state may not rely on either “mere speculation” or “unsupported assertions” but, rather, must proffer “concrete evidence” demonstrating that the main effect of the law is the advancement of, say, public health and safety, not economic protectionism. Id. at 2474 (quoting Granholm, 544 U.S. at 490, 492). If the law’s predominant effect is protectionist in nature, such that it cannot be upheld under the Twenty-first Amendment, the court must then determine [*9]  whether the law “advances a legitimate local purpose that cannot be adequately served by reasonable nondiscriminatory alternatives.” Granholm, 544 U.S. at 489 (quoting New Energy Co. of Ind. v. Limbach, 486 U.S. 269, 278, 108 S. Ct. 1803, 100 L. Ed. 2d 302 (1988)).”

Applying this analysis to the facts, the Court found that the statute facially discriminated against out-of-state retailers through only issuing licenses to in-state residents or in-state businesses and by requiring retail licensees to maintain a physical presence within the state. Holding that “[d]ue to those restrictions, out-of-state retailers cannot sell or deliver alcoholic beverages to Rhode Island residents within the borders of the state (as Rhode Island retailers can).”

Important to the developing application of the Tennessee Wine precedent across the Circuits, the First Circuit then went on to hold that the methodology and findings of the District Court were not a proper application of Tennessee Wine and that mere intertwining with the three-tiered system was insufficient justification for a law’s discrimination and as proof of health and safety impact and noting the Court failed to assess whether the Plaintiff’s evidence met the burden of actually rebutting any such evidence (this is an important point for deciding where these burdens lie and developing how a 21st Amendment-related statute is analyzed vis-a-vis the Dormant Commerce Clause):

“Despite that impediment to interstate commerce, the district court upheld the in-state-presence requirement on the ground that it is integral to Rhode Island’s three-tier system of  alcohol regulation and, thus, a valid exercise of the state’s authority under the Twenty-first Amendment. See Anvar, 633 F. Supp. 3d at 598-99. In announcing this holding, the court relied in part on a Supreme Court dictum describing the three-tier system of alcohol regulation in favorable terms. See id.

“We do not gainsay that the Supreme Court has, in the past, described the implementation of a three-tier system as an appropriate use of a state’s authority under the Twenty-first Amendment. See Granholm, 544 U.S. at 489 (“We have previously recognized that the three-tier system itself is ‘unquestionably legitimate.'” (quoting North Dakota v. United States, 495 U.S. 423, 432, 110 S. Ct. 1986, 109 L. Ed. 2d 420 (1990))); see also Cherry Hill Vineyard, LLC v. Baldacci, 505 F.3d 28, 30 (1st Cir. 2007). But the Court, of late, has cautioned that the Twenty-first Amendment does not necessarily “sanction[] every discriminatory feature that a State may incorporate into its three-tiered scheme.” Tenn. Wine, 139 S. Ct. at 2471. Each state’s variation of the three-tier system, then, “must be judged based on its own features.” Id. at 2472.

“Here, the district court concluded that the in-state-presence requirement is an essential feature of Rhode Island’s three-tier system because it allows state officials to conduct on-site inspections to ensure compliance with the law. See Anvar, 633 F. Supp. 3d at 599. But the court arrived at that conclusion based on an expert report affirming that principle in the abstract, together with the naked fact that retailers are required by law to maintain certain sales records for inspection. See R.I. Gen. Laws § 3-7-28. At no point did the court engage with any “concrete evidence” as to how the in-state-presence requirement furthers the legitimate aims of the Twenty-first Amendment. Tenn. Wine, 139 S. Ct. at 2474 (quoting Granholm, 544 U.S. at 490). For instance, the court made no mention of whether such enforcement actions actually take place, whether such efforts have effectively curtailed behavior deleterious to the public health, or whether the requirement has tangibly benefited public health and safety in some other way.

“Nor did the district court explicitly consider whether the plaintiffs’ arguments or proffered evidence were sufficient to rebut the defendants’ stated justification for the in-state-presence requirement. Cf. Lebamoff Enters. Inc. v. Whitmer, 956 F.3d 863, 879 (6th Cir. 2020) (McKeague, J., concurring) (upholding alcohol regulation because plaintiffs failed to produce “sufficient countervailing evidence” rebutting state’s showing that law promoted public health). The plaintiffs offer data and reports ostensibly demonstrating that states that allow out-of-state retail deliveries of alcohol do not experience a corresponding erosion in public health and safety. They also insist that Rhode Island’s rationale for imposing an in-state-presence requirement on retailers is undercut by the exception available to out-of-state manufacturers, who can deliver directly to consumers as long as consumers make their purchases from the manufacturer’s premises. See R.I. Gen. Laws § 3-4-8. Whether this showing outweighs the defendants’ offer of proof is a matter to be decided in the first instance by the district court. See Block, 74 F.4th at 414 (remanding to district court to assess evidence within framework erected by Tennessee Wine).

“The short of it is that a discriminatory aspect of a state’s version of the three-tier system cannot be given a judicial seal of approval premised either on the virtues of three-tier systems generally or on the basis of a theoretical benefit to public health and safety associated with the challenged regulation. See Tenn. Wine, 139 S. Ct. at 2474-75. After all, there is nothing inherent in the three-tier system — which aims at preventing vertical integration between alcohol producers, wholesalers, and retailers — that necessarily demands an in-state-presence requirement for retailers. See B-21 Wines, Inc., 36 F.4th at 235 (Wilkinson, J., dissenting) (“One can easily imagine a state maintaining a strict licensing regime to ensure that the tiers remain distinctly owned, while treating in-state and out-of-state retailers alike.”).  But see id. at 229 (upholding in-state retailer requirement as integral to three-tier system); Sarasota Wine Mkt., LLC v. Schmitt, 987 F.3d 1171, 1185 (8th Cir. 2021) (same). Such a requirement — if it is to be sanctioned — must be supported by “concrete evidence” demonstrating that its predominant effect advances the goals of the Twenty-first Amendment and not merely the protection of in-state business interests. Tenn. Wine, 139 S. Ct. at 2474 (quoting Granholm, 544 U.S. at 490); see Block, 74 F.4th at 414.”

The Circuit Court sent the matter back to the District Court for further “fuller” consideration of the parties’ respective offers of proof.

Cases ruling that a summary dismissal without evidentiary presentation and assessment with the parties having to prove their assertions that the challenged statutes satisfy the stated goals of health and safety (or perhaps other justifications) appear headed in the same direction: prove it.

With this rubric as a backdrop, States looking to keep their in-state vs. out-of-state retailer shipping and delivery rights and any other regulation or statute discriminating against in-state vs out-of-state parties need to start developing a body of data demonstrating the causal link between the statutes and regulations and the health and safety benefits they promote. This will need to take place post hoc for existing laws that were not backed by legislative commission studies (findings may be suspect and challenged, but the underlying data for those findings, the studies and data produced by commissions in preparing findings are the kind of evidence that will flourish under this analysis). For new regulations and laws a commission requiring a process for the provision of evidence to a committee for consideration, and even contrapositives and rebuttals would go a long way to creating the body of evidence a State needs for this kind of challenge.

Other important points from this decision:

1. The 1st Circuit agreed with the B-21 Wines 4th Circuit rejection of the standard Commerce Clause analysis which requires an assessment of available alternatives holding that these alternatives are relevant in the assessment of whether a law actually achieves the health and safety or other purported goals or impacts of the statute but rejected the notion that they are a necessary analysis in 21st Amendment jurisprudence relating to Commerce Clause challenges as an end-all necessary element of the considerations a court must undertake and that a law must satisfy to keep its constitutional status from running into the Dormant Commerce Clause red.

2. What about the anticompetitive effects of vertical integration and the impact trade practices and the three-tiered system have on anticompetitive behaviors and lawful business dealing? Antitrust principles promoted by trade practice laws and the codification of the separation of retailers from producers should be asserted as an additional justification – another “legitimate interest” under Tennessee Wine’s rationale:

“For these reasons, we reject the Association’s overly broad understanding of §2. That provision 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 it does not license the States to adopt protectionist measures with no demonstrable connection to those interests.” …

“Recognizing that §2 was adopted to give each State the authority to address alcohol-related public health and safety issues in accordance with the preferences of its citizens, we ask whether the challenged requirement can be justified as a public health or safety measure or on some other legitimate nonprotectionist ground. Section 2 gives the States regulatory authority that they would not otherwise enjoy, but as we pointed out in Granholm, “mere speculation” or “unsupported assertions” are insufficient to sustain a law that would otherwise violate the Commerce Clause. 544 U. S., at 490, 492. Where the predominant effect of a law is protectionism, not the protection of public health or safety, it is not shielded by §2.”

I’m certain there are other “legitimate interests” and that a decent causal link might be probed between “safety” (not just for consumers but for businesses dealing in the trade as well) and some in-state vs out-of-state prohibitions. 

Additionally, it should be obvious that if certain regimes and actions presently do not meet the bar set by the Tennessee Wine test, a State would be free to enact laws that do. The benefit of these cases may not be in reducing restrictions on sales but in creating restrictions that are causally linked to stated benefits and legitimate interests.