Will the Supreme Court's Tennessee Decision Dramatically Change the U.S. Wine Market?

The highest court delivered a win for consumers last month. Here's how this could affect alcohol regulations in the U.S.

Will the Supreme Court's Tennessee Decision Dramatically Change the U.S. Wine Market?
Will the court's ruling threaten other state alcohol laws? (istockphotos)
Jul 12, 2019

How big an impact will the U.S. Supreme Court's recent wine decision have on consumers around the country? On June 26, the court handed down a milestone ruling in Tennessee Wine and Spirits Retailers Association v. Russell F. Thomas, striking down Tennessee's durational residency requirement for alcohol retailers, which mandated that only people who had lived in the state for two years or more could get a license to sell alcohol. In a 7-2 ruling, the majority opinion declared that the law existed only for economic protectionism, and not to promote temperance and an orderly market.

While the issue at hand was narrow in scope, the decision may have larger consequences for the wine market, including opening the door to challenges to laws that ban wine retailers from shipping to customers in other states.

For now, the ruling brought reprieve to the two wine retailers in the case— multi-state giant Total Wine & More and the mom-and-pop liquor store Kimbrough Fine Wine and Spirits, owned by Doug and Mary Ketchum. Each had applied for a liquor license in Tennessee in 2016, only to be blocked because the Tennessee Wine and Spirits Retailers Association (TWSRA) threatened to sue the state if it issued the licenses, because neither applicant satisfied the two-year residency requirement.

"We are very excited about the positive ruling," Doug Ketchum told Wine Spectator. "We can focus on growing our business and look forward to the future and more importantly [this] give[s] us more time to spend with our handicapped daughter, Stacie, which was the reason we made the decision to move and purchase a business in the first place."

Total Wine issued a statement: "The court's ruling today is a victory for consumers in Tennessee and will allow Total Wine & More to continue to bring great service, selection and prices to consumers in its first store in Knoxville, as well as in a second store planned for Brentwood later next year."

Learn more about the case with our comprehensive background report
Read our report on the June 26 decision
Read our report on the Jan. 16 oral arguments
Find out your state's wine-shipping laws

But beyond the immediate implications for Tennessee, there may be ripple effects nationwide in terms of what liquor laws states can enact. With the Tennessee Retailers decision, is the court signaling that it is less tolerant of state laws restricting alcohol sales?

A 14-year debate put to rest

The case revisited the tension between the 21st Amendment and other parts of the Constitution. That Amendment overturned Prohibition but allowed states to regulate alcohol sales for the purpose of promoting temperance and an orderly market. In the decades since, the court has had to weigh whether that power, section 2 of the amendment, gives states the right to ignore other parts of the Constitution, including the Commerce Clause.

In 2005's Granholm v. Heald decision, the Supreme Court struck down bans against out-of-state wineries shipping to customers in states where it was legal for in-state wineries to do so, ruling this violated the Commerce Clause. It was a landmark decision in the industry; today most states allow some form of out-of-state winery direct shipping. But the case did not address retailers.

Since then, many legislative and legal battles have been fought over retailer direct shipping. Proponents claimed Granholm applied to retailers as well; opponents countered that Granholm only applied to products and producers, not merchants.

With the majority opinion in Tennessee Retailers, that ambiguity has finally been settled. "Granholm never said that its reading of history or its Commerce Clause analysis was limited to discrimination against products or producers. On the contrary, the court stated that the clause prohibits state discrimination against 'all out-of-state economic interests,'" wrote Justice Samuel Alito in his opinion.

Another argument put forward in the case by the TWSRA and its supporters was that striking down Tennessee's residency law would invalidate the three-tier system, a distribution structure that Granholm called "unquestionably legitimate." Alito wrote that, "This argument ... reads far too much into Granholm's discussion of the three-tiered model. Although Granholm spoke approvingly of that basic model, it did not suggest that [section 2 of the 21st Amendment] sanctions every discriminatory feature that a state may incorporate into its three-tiered scheme." Tennessee's durational residency requirement was "not an essential feature of a three-tiered scheme," Alito added.

How big is the decision's impact?

If Tennessee's law is not saved by the 21st Amendment, what other laws nationwide could be deemed discriminatory and, as a result, unconstitutional?

"I don't think it's possible for discriminatory wine retailer shipping laws to stand now," said Tom Wark, the executive director of the National Association of Wine Retailers (NAWR), which filed an amicus brief in favor of the respondents. The NAWR is a proponent of loosening shipping laws, and Wark believes the court's ruling on Tennessee Retailers puts his organization and its allies in a very good position to make their case for out-of-state retailer direct shipping in states that currently prohibit it.

But not everyone agrees the case will have such consequences. "Since alcohol is unlike any other consumer good, the 21st Amendment was enacted to give states authority to regulate alcohol as they see fit and that authority remains broad," read a statement from the Wine and Spirits Wholesalers of America, which filed an amicus brief in favor of the petitioner. "In exercising that authority, states have enacted the three-tier system to promote accountability, public safety, and economic competition. The vast majority of state alcohol laws are not impacted by this ruling."

The battles ahead

Indeed, while there was much rejoicing by shipping supporters, consumers in the 37 states that currently ban out-of-state retailer shipping shouldn't expect to be able to order wine online from beyond their state's borders anytime soon. "From a legal perspective, [the justices] narrowly struck down the law. And it leaves all sorts of other questions unanswered," said William Cheek III, partner at Waller Lansden Dortch & Davis.

"It's not as though this case definitely opened up the doors to retailers direct-to-consumer shipping in all states, but it's certainly cause to question any discriminatory laws that a state may have for in-state retailers versus out-of-state retailers," said Lindsey Zahn, an attorney at Lehrman Beverage Law.

After Granholm, winery direct shipping was far from automatic. Some states' bans fell shortly afterward as a result of the ruling, like those in Ohio and Florida, while it took years of direct shipping advocates lobbying individual state lawmakers to make the case for why winery direct shipping (both in-state and out-of-state) should be legal.

Here, there is the added complexity that proponents of retailer direct shipping will have to convince courts and states that Tennessee Retailers does indeed apply to their plight, since on its face, it dealt only with Tennessee's durational residency law. But the players at the forefront of this fight remain hopeful.

"I was concerned that it would be a very narrow decision only knocking down the residency [rule], but they went way beyond that," said Robert Epstein, a lawyer who represented a plaintiff in Granholm. "The opinion is so broad and helpful to us that we're just moving forward and [hoping] for the best," he added when asked about potential obstacles. Epstein is involved in four pending retailer shipping cases in lower courts—in Michigan, Illinois, Missouri and California—that he thinks have a good chance of succeeding as a result of the Tennessee Retailers decision.

Wark is also hopeful, but foresees setbacks if states decide to shut down all retailer shipping, both in-state and out-of-state, so that there's no discrimination. He is intent on convincing lawmakers not to do that. "Direct-to-consumer shipping from out-of-state retailers is good for the state," he said. "The state will receive additional taxes and they'll bring out-of-state retailers under their regulatory umbrella if they create permits for out-of-state retailers to obtain."

The "Amazon of liquor"

A concept that remained mostly on the sidelines of the Tennessee Retailers debate but is key to retailer direct shipping is physical presence. Can a state mandate that a retailer reside in a state in order to ship alcohol to its residents?

Physical presence was briefly discussed in the majority opinion of this case. Justice Alito mentioned an argument in Granholm made by the petitioner states, Michigan and New York, that "the prohibition on the shipment of wine from out-of-state sources was justified because the state could not adequately monitor the activities of nonresident entities." However, Justice Alito continued, the court dismissed this because of "improvements in technology" that would seemingly make it easy for states to exercise their regulatory authority on out-of-state wineries. He did add, however, that in Tennessee Retailers "the argument is even less persuasive since the stores at issue are physically located within the state." Could the argument be persuasive if the stores resided outside the state, like the wineries in Granholm were?

Justice Neil Gorsuch addressed this issue head-on, during both oral arguments when he speculated about an "Amazon of liquor" business model, and once in his dissenting opinion. "If residency requirements are problematic, what about simple physical presence laws? After all, can't states 'thoroughly investigate applicants' for liquor licenses without requiring them to have a brick-and-mortar store in the state?" he wrote. His view of this potential outcome is not sympathetic, but this is certainly an argument that proponents of retailer direct shipping could advance in light of the latest decision.

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Cheek, of Waller Lansden Dortch & Davis, does not believe physical presence is actually important when it comes to states investigating an applicant for a liquor license, but rather, he stresses the importance of a brick-and-mortar store in point-of-sale decisions. "Physical presence has to do with sizing someone up to see if they are fit to purchase alcohol. Are they 21 or older? And are they intoxicated? Those are the two primary concerns," he said.

However, he added that current developments in alcohol-delivery services, which have become mainstream, have made this argument irrelevant. States will have a hard time arguing for the need for physical presence, he says, when companies like Drizly are free to deliver to in-state residents, with the responsibility of screening purchasers falling on delivery persons.

What about temperance?

Epstein remembers when opponents of out-of-state winery shipping raised the specter of minors getting their hands on alcohol in Granholm. The Supreme Court ended up brushing the argument aside because that was not what was being decided—the case was about discrimination. This begs the question: Does the court not value the 21st Amendment's goal of promoting temperance?

Today is a very different time from 1933, when the 21st Amendment was ratified, walking back Prohibition. Many Americans admitted that the "noble experiment" had failed, but still had concerns about the abuses of alcohol. In his dissent, Justice Gorsuch argued that because centralized control of alcohol failed, local control was granted by section 2 of the 21st Amendment, and that the power is broad. "After all, both before Prohibition and after repeal, robust competition in the liquor industry was far from universally considered an unalloyed good; lower prices enabled higher consumption and invited social problems along the way," he wrote.

The majority opinion did not embrace section 2 as broadly. "Section 2 of the 21st Amendment grants the states latitude with respect to the regulation of alcohol, but it does not allow the states to violate the 'nondiscrimination principle' that was a central feature of the regulatory regime that the provision was meant to constitutionalize," said Justice Alito.

"The court's views on temperance have changed," said Epstein. As evidenced by the strong defense of the Commerce Clause in Tennessee Retailers, many court watchers believe the Supreme Court has not put as much weight on the 21st Amendment as other constitutional clauses.

"It could be that they don't consider it to be nearly as relevant today as it was when it was passed," said Cheek. "I think it gives a green light to the lower courts to place more emphasis on the Commerce Clause and deemphasize the 21st Amendment, and that's going to be in favor of commerce, and you're going to see more lower courts striking down historical laws." If this is the case, many state laws restricting alcohol sales could come under scrutiny and fall.

Of course, the court still believes a health and welfare argument can be made for a state liquor law, but the bar seems to have been nudged higher with this decision. There will likely be many future cases in lower courts—and perhaps one day again in the Supreme Court—that will discuss the merits of certain state liquor laws and whether they promote temperance or economic protectionism. Wark, of NAWR, notes the evolution of the court on this issue, pointing out that Granholm was decided in a 5-4 decision in 2005, and Tennessee Retailers, in 2019, in a 7-2 decision. On matters of alcohol regulation, the views of the highest court in the land may well be shifting.

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