Case involving alcohol law allowing in-state distilleries shipping direct to citizens and prohibiting out-of-state distilleries from doing the same allowed to proceed after direct comparison to Granholm.

In a classic Granholm v. Heald situation involving a lack of parity between in-state and out-of-state distilleries, Washington state allows in-state distilleries the privileges of direct sale and shipment of their liquors to Washington residents and restricts out-of-state distilleries from doing the same.

Under the Washington laws for alcohol production and sale, Washington distilleries can act as a retailer of their products (and those of other distilleries) if they abide by retailer rules – primarily – maintaining a physical presence in the state. Distilleries that have a physical retail location can ship internet orders directly to customers. The in-state physical presence requirement keeps out-of-state distilleries from making direct shipments to Washington consumers.

A New York distillery and some Washington residents filed suit over the statutory direct shipping scheme’s discriminatory impact alleging (you guessed it) that the law violates the principles of the Supreme Court’s Dormant Commerce Clause jurisprudence by offering favorable benefit to in-state distilleries and negatively treating out-of-state distilleries. 

The state moved to dismiss the complaint arguing that an “unquestionably legitimate” three-tiered system allowed the variance between privileges and restrictions granted in-state and imposed on out-of-state distilleries under the Washington law. In allowing distilleries to operate as retailers, Washington keeps alcohol in its state system and regulatory regime and allowing out-of-state distilleries to ship direct as Washington distilleries can would allow those out-of-state distilleries to bypass the Washington regulatory system.

You’ll see right away that the bare threads of the “we treat them like retailers” argument is  a pretext meant to try and couch the discrimination in terms of a retailer-tier Dormant Commerce Clause dispute and not a Granholm-style manufacturing and direct shipping tier one. The fallacious distinction would swallow Granholm and reverse the decision completely. The Court in this case did not buy it either.

In denying the motion to dismiss, the court held:

In Granholm v. Heald, the Court considered a challenge to a regulatory scheme not unlike the one here. 544 U.S. 460, 472, 125 S. Ct. 1885, 161 L. Ed. 2d 796 (2005). There, producers and consumers challenged Michigan and New York’s restrictions on out-of-state shipments of wine. Id. at 465-66. Both states, which had adopted a three-tier structure similar to Washington’s, permitted direct shipments from in-state wine producers to in-state consumers, but restricted out-of-state wineries from making similar direct shipments. Id. at 469-70. Michigan banned out-of-state direct shipments altogether, whereas New York required out-of-state wineries to establish an in-state distribution operation before they could directly ship to in-state consumers. Id. at 473-74.

The Granholm Court had little trouble concluding that Michigan’s total ban as well as New York’s physical presence requirement discriminated against interstate commerce. Id. at 475 (“New York’s in-state presence requirement runs contrary to our admonition that States cannot require an out-of-state firm ‘to become a resident in order to compete on equal terms.'”) (quoting Halliburton Oil Well Cementing Co. v. Reily, 373 U.S. 64, 72, 83 S. Ct. 1201, 10 L. Ed. 2d 202 (1963)). The States urged that the laws were permissible despite their discriminatory character because they advanced the legitimate purposes of keeping minors from obtaining alcohol and facilitating tax collection. Id. at 490. The Court rebuffed those rationalizations, concluding the Commerce Clause “demand[s] more than mere speculation to support discrimination against out-of-state goods . . . Michigan and New York have not satisfied this exacting standard.” Id. at 492-93.

More recently, in Tennessee Wine & Spirits Retailers Ass’n, the Court accepted a challenge to Tennessee’s two-year durational residency requirement for corporations seeking to sell alcoholic beverages to in-state consumers. 139 S. Ct. 2449, 204 L. Ed. 2d 801. In striking down the law as violative of the dormant Commerce Clause, the Court closely examined the history of the Twenty-first Amendment and the Commerce Clause, explaining:

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. Where the predominant effect of a law is protectionism, not the protection of public health or safety, it is not shielded by § 2.

Id. at 2474 (internal citation omitted).

Defendant quotes Granholm for the proposition that “the three-tier system itself is ‘unquestionably legitimate'” and argues that Plaintiff’s challenge represents a threat to Washington’s three-tier system “by allowing out-of-state distillers to bypass Washington’s regulated market.” 544 U.S. at 489 (internal citation and quotation omitted); But as in Michigan, New York, and Tennessee, the legitimacy of Washington’s three-tier system is not put in issue by a scheme which allows in-state distributors to eschew the standard three-tier scheme requirements and sell directly to consumers while denying out-of-state distributors the same privilege. At this juncture, in light of the foregoing Supreme Court precedent on similar state bans, Defendant’s proffered rationalizations do not appear to support Washington’s discrimination against out-of-state distributors.

The case now proceeds with the development of evidence in the way Tennessee Wine intended. 

Ashley Brandt

Hi there! I’m happy you’re here. My name is Ashley Brandt and I’m an attorney in Chicago representing clients in the Food and Beverage, Advertising, Media, and Real Estate industries. A while back I kept getting calls and questions from industry professionals and attorneys looking for advice and information on a fun and unique area of law that I’m lucky enough to practice in. These calls represented a serious lack of, and need for, some answers, news, and information on the legal aspects of marketing and media. I've got this deep seeded belief that information should be readily available and that the greatest benefit from the information age is open access to knowledge... so ... this blog seemed like the best way to accomplish that. I enjoy being an attorney and it’s given me some amazing opportunities, wonderful experiences, and an appreciation and love for this work. I live in Chicago and work at an exceptional law firm, Goldstein & McClintock, with some truly brilliant people. Feel free to contact me at any time with any issues, comments, concerns… frankly, after reading this far, I hope you take the time to at least let me know what you think about the blog and how I can make it a better resource.

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