Court finds statute barring retailer warehouse storage out of jurisdiction of alcoholic beverage control authority does not violate Dormant Commerce Clause. Finally, a Tennessee Wine case that is NOT about direct wine shipping.

We will look back to find that the greatest result of Tennessee Wine’s “test” allowing “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” comes from the ability of lower courts to kick the idea around for a while and see what happens and what comes up before ever needing the Supreme Court to address the issue again. 139 S. Ct. 2449, 2474.

Taken at face value, it certainly means that public health and safety impacts of alcohol related laws – when those impacts are proven – can result in a state policy with some discriminatory effect surviving Dormant Commerce Clause scrutiny. “Proven” is, at present, a moving target and something getting hashed out at the Circuit and District Court level. 

Words matter, so the case also stands for the proposition that things beyond public health and safety, the “other legitimate interests,” exist and will get adjudicated, tested and found sufficient as well. Perhaps one of the reasons the wine retailer direct shipping cases keep losing their cert petitions is that the issue hasn’t aged long enough.

That’s why there should be some excitement when a case that doesn’t involve wine shipping pops up for consideration under Tennessee Wine.

That’s what we have in DC Winery v. D.C. Alcoholic Beverage Control Board. In DC Winery, a wine retailer with an “endorsement” to manufacture wine in Washington D.C. had limited space in its District of Columbia facility and was storing large amounts of the wine it makes (approximately 168,000 bottles) in a warehouse called International Cellars across the border in Sterling, Virginia. The wine was then shipped from the warehouse back to the retailer’s property in D.C. as needed. The District of Columbia Alcoholic Beverage Regulation Administration (“ABRA”) (overseen by the Alcoholic Beverage Control Board) learned that the retailer was storing wine outside the District of Columbia in Virginia and sent an investigative team to International Cellars to investigate and confirm the storage situation. The Board held a hearing alleging the retailer violated D.C. Code § 25-754(b) (no storage outside the District) by storing wine outside the District. Importantly, this very issue was the subject of an opinion in 1996 (prior to Granholm and Tennessee Wine) finding the same statute constitutional Milton S. Kronheim & Co., Inc. v. Dist. of Columbia, 91 F.3d 193 (D.C. Cir. 1996).

The Board’s summary of Kronheim is insightful and demonstrates that what we call the Tennessee Wine Test doesn’t really draw on new Constitutional principles, but expands and defines them:

“In Kronheim, the D.C. Circuit Court of Appeals examined the storage requirement under the dormant Commerce Clause. Id. at 198. Based on its review, the Kronheim court found the statute “facially discriminatory” and likely protectionist. Id. at 202-03. Nevertheless, the Kronheim court considered the Supreme Court’s precedent in Bacchus that overturned a Hawaii alcohol tax exemption where the primary justification by Hawaii for the tax exemption was to promote local industry. Id. at 203 citing Bacchus Imports, Ltd. v. Dias, 468 U.S. 263, 270 (1984). Unlike the law enacted by Hawaii in Bacchus, the Kronheim court recognized that the District had a “mixed motive” for enacting the rule. Id. at 202. In particular, in Kronheim, the District also had legitimate reasons for the law, such as “auditing company records, monitoring compliance with the ABC laws, monitoring licenses, checking tax forms for audits, and similar enforcement goals.” Id. at 202 (quotation marks omitted) (emphasis added). Thus, despite being facially discriminatory, the District’s requirement banning licensees from storing alcohol outside the District was “supported by a clear concern for the core enforcement function of the TwentyFirst Amendment.” Id. at 204”

The winery/retailer in this case did not contest the facts nor that it violated the statute and argued instead that the code section regarding storing wine outside the District violated the Dormant Commerce Clause principles and that §2 of the Twenty-First Amendment did not save the statute under Tennessee Wine.

The Board found against the retailer, fining it $1,500 and ordering it to stop storing wine outside the District and imposed other conditions. You can read the Board’s decision and findings of fact here, importantly the Board considered the Twenty-First Amendment considerations ala Tennessee Wine. In assessing the Tennessee Wine test, the Board found some justifications for the law that (while the appellate court appears to chalk them up to public health and safety) could certainly also be other legitimate interests.

41. Additionally, allowing alcohol to be moved outside the District creates opportunities for other types of illegal behavior that cannot be deterred without a credible threat of an on-site inspection. For example, consider the following scenarios:

(1) An on-premise retailer holds a wine pub endorsement and stores alcohol outside the District. The retailer engages in bottling, dilution, mixing, labeling, aging, and other activities at the out of state storage location. Because ABRA cannot conduct an inspection of an out-of-state storage facility, ABRA cannot determine whether the retailer is fully compliant with the on-site manufacturing requirement or the exception for off-site production up to 600 feet from the premises. D.C. Code § 25-124(c-1); see also D.C. Code §§ 25-117(a)(3), 25-125(c-1) (showing the same reasoning applies to brew pubs and distillery pubs because they operate under similar rules).

(2) A retailer uses an out of state storage facility. A manufacturer or wholesaler provides the retailer with discounted or free space, labor, and other goods and services at the out-of -state storage facility that is not subject to inspection. Thus, the out of state operations are shielded from inspections that may detect cases where manufacturers and wholesalers are attempting to obtain undue influence or inappropriate interests in the operations of other alcohol industry members, as prohibited by D.C. Official Code §§ 25-302, 25-735, 25- 736, and 25-824.

(3) A retailer is subject to credit and alcohol purchasing restrictions for failing to make a required payment to a wholesaler pursuant to D.C. Official Code § 25-731(c) and stores alcohol outside the District. In order to obtain a popular alcoholic beverage produced by national alcohol manufacture and distributed by a licensed wholesaler, the retailer attempts to evade the credit and purchase restrictions by illegally buying the product from an off-premises retailer located either in the District or another state. See D.C. Code §§25-111(a), 25-112(C)(c). In this case, the retailer would be able to evade detection because the retailer can commingle the illegally bought products with any remaining product in their inventory, or otherwise claim legitimately bought product exists to hide illegally purchased product, at the off-site storage facility located outside the District, which cannot be detected because the storage facility cannot be visually inspected to see if the licensee’s inventory matches their alcohol invoices.

42. Finally, a storage facility located outside the District of Columbia cannot be inspected to determine whether the activities conducted at the facility exceed those permitted by the District’s storage laws. See, e.g., 23 DCMR §§ 205.2 (authorizing certain activities, such as packaging and shipping); 205.5 (authorizing the removal of alcohol from a storage facility for limited reasons); 205.6 (requiring the facility to meet certain security, zoning, and physical separate standards); 205.8 (restricting outside activity at the storage facility); 205.9 (restricting the consumption of alcohol without a permit); 205.10 (requiring the display of certain signs and the presence of various documents).

The retailer/wine pub appealed and the DC Court of Appeals assessed the arguments the winery made asserting that the storage requirement violated the Tennessee Wine criteria.

The court reiterated the Constitutional test in a familiar fashion:

“When a state law governing alcohol discriminates against out-of-state economic interests, § 2 of the Twenty-first Amendment compels “a different inquiry.” Tenn. Wine, 139 S. Ct. at 2474. First, we assess if the law discriminates against out-of-state economic interests. Id.; see B-21 Wines, Inc. v. Bauer, 36 F.4th 214, 222 (4th Cir. 2022), cert. denied, 143 S. Ct. 567, 214 L. Ed. 2d 336 (2023). If not, the law is constitutional. Tenn. Wine, 139 S. Ct. at 2474. If the alcohol law does discriminate against out-of-state economic interests, it survives constitutional scrutiny if it “can be justified as a public health or safety measure or on some other legitimate nonprotectionist ground.” Id.”

The Court went on to find that the statutory requirement facilitated legitimate nonprotectionist grounds, and while it referred to how those grounds facilitated health and safety, they are activities and grounds that we haven’t much seen asserted as health and safety grounds before:

“A state alcohol law can permissibly discriminate against interstate commerce if the law can be justified on legitimate nonprotectionist grounds. Tenn. Wine, 139 S. Ct. at 2474-76. The law’s connection to those nonprotectionist grounds cannot rely on “mere speculation” or “unsupported assertions.” Id. (quoting Granholm v. Heald, 544 U.S. 460, 490, 492, 125 S. Ct. 1885, 161 L. Ed. 2d 796 (2005)). We will therefore not uphold a discriminatory law if “the record is devoid of any ‘concrete evidence’ showing” that the law promotes legitimate nonprotectionist interests. Id. (quoting Granholm, 544 U.S. at 490). Further, a law will not stand if it was passed for “purely protectionist purposes” or [*8]  if its “predominant effect . . . is protectionism.” Id. at 2469, 2474. In Tennessee Wine, the Court invalidated a law that required applicants for liquor store licenses to live in-state for at least two years before applying. Id. at 2474-75. The law facially discriminated against nonresidents and “ha[d] at best a highly attenuated relationship” to nonprotectionist interests—in that case, public health and safety. Id. at 2474. For starters, the record lacked evidence linking the residency requirement to public health and safety because the State did not defend the requirement on health and safety grounds until the case reached the Supreme Court. Id. at 2474-75. The Court readily dismissed the State’s nonprotectionist arguments. For example, the residency requirement was not necessary to help the State oversee liquor store operators “since the stores at issue are physically located within the State” such that “the State can monitor the stores’ operations through on-site inspections, audits, and the like.” Id. at 2475. In short, the law was unconstitutional because its predominant effect was protecting in-state interests from out-of-state competition, not promoting the nonprotectionist interests of public health and safety. Id. at 2476.”

“Here, legitimate nonprotectionist [*9]  interests underpin § 25-754(b), as the record indicates. When the D.C. Circuit heard a dormant Commerce Clause challenge to § 25-754(b)’s predecessor in 1996, that court explained that the law “both by its terms and according to its history is designed to advance the core enforcement purposes protected by [§] 2 of the Twenty-first Amendment.” Kronheim, 91 F.3d at 203. In upholding the law, the court recognized that “D.C.’s claimed motives of ‘legitimate state interests which would be promoted by requiring geographic proximity of warehouses, e.g., auditing company records, monitoring compliance with the ABC laws, monitoring licenses, checking tax forms for audits, etc.,’ [] falls squarely within the state’s core enforcement powers over alcohol.” Id. at 203-04 (citation omitted) (quoting Quality Brands, Inc. v. Barry, 715 F. Supp. 1138, 1141 (D.D.C. 1989)). HN13[ ] Admittedly, the statute’s legislative history shows some potentially protectionist purposes behind § 25-754(b). See Kronheim, 91 F.3d at 203. Yet § 25-754(b)’s purpose and effect are not “purely protectionist” given the statute’s firm ties to the District’s inspection and enforcement interests.”

“Section 25-754(b) clearly facilitates the District’s broad inspection and enforcement goals for alcohol storage. In addition to those addressed in Kronheim, the District identifies other ways in which limiting alcohol storage to D.C. enables ABRA to effectively execute its statutory [*10]  responsibilities related to public health and safety. For example, in-person inspections can detect and deter violations of laws against bottle tampering, see D.C. Code § 25-833(a), and the unlawful consumption of alcohol at storage facilities, see id. § 25-754(c), as well as a storage facility’s compliance with security requirements, limits on outside activity, and proper display of warning signs, see 23 D.C.M.R. §§ 209.3-.11. The Board’s order’s point-by-point explanation of how ABRA’s inspection authority detects and deters violations of these and related regulations exceeds “mere speculation or unsupported assertions.” Tenn. Wine, 139 S. Ct. at 2474 (internal quotation marks omitted). HN14[ ] Indeed, Tennessee Wine’s observation that when liquor stores “are physically located within the State[,] . . . the State can monitor the stores’ operations through on-site inspections, audits, and the like” rings true for alcohol storage facilities too. Id. at 2475. This monitoring “‘provides strong incentives not to [store] alcohol’ in a way that threatens public health or safety.” Id. (quoting Granholm, 544 U.S. at 490). Therefore, the in-District storage requirement’s “predominant effect” is not protectionism, but promoting the proper supervision of alcohol in the District by enabling ABRA to effectively inspect alcohol [*11]  storage facilities and enforce the law. The totality of nonprotectionist grounds clearly justifies § 25-754(b) under § 2 of the Twenty-first Amendment and, as explained below, petitioner’s proposed alternatives for storing alcohol outside D.C. do not alter that conclusion.”

The court also rejected the argument that alternatives existed, primarily that the beverage control authority could enforce its laws outside its jurisdiction and whether allowing retailers to import directly from outside the District without using a wholesaler somehow implied a workable exception to out-of-state storage. In short – No.

So, we are seeing the body of law progress and develop in a way that finds other justifications. This one involves the interests of an alcoholic beverage control authority’s ability to inspect retailer’s premises to ensure inventory and lawful use and activity and that ability’s relation to public health and safety. While public health and safety gets cited, and is certainly the interest for #1 from paragraph 41 in the Board decision, it is arguable that another legitimate interest is in play here. In #2 and #3 from the Board’s decision, the enforcement of trade practice laws is definitely the justification and I do not believe it needs to be resolved or analogized, to public health and safety. It could certainly be another legitimate interest, especially since those trade practices have Federal equivalents.

It is good to see these cases developing outside the direct wine shipping context.

Side Note: One assumes this wine was federally tax-paid and that it had been racked and labeled and that DC Winery made a conscious decision not to create shiners and attempt to transfer in bond to another DC Winery bonded premises outside the District and then bring it back and label it through another transfer in bond back to the DC facility when it needed it. This would be a method that would likely take it out of consideration under this DC statutory rationale and allow them to argue preemption for the practice if it was challenged. But that didn’t happen here.