Amicus Curiae Brief — Tennessee Wine and Spirits Retailers Association, Petitioner v. Russell F. Thomas, Executive Director of the Tennessee Alcoholic Beverage Commission, et al.
Supreme Court briefNov 20, 2018
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No. 18-96
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In The
Supreme Court of the United States
-----------------------------------------------------------------TENNESSEE WINE AND SPIRITS
RETAILERS ASSOCIATION,
Petitioner,
v.
CLAYTON BYRD, AFFLEURE INVESTMENTS, INC.,
AND TENNESSEE FINE WINES AND SPIRITS, LLC,
Respondents.
-----------------------------------------------------------------On Writ Of Certiorari To The
United States Court Of Appeals
For The Sixth Circuit
-----------------------------------------------------------------BRIEF OF AMICUS CURIAE CONSUMER ACTION
IN SUPPORT OF PETITIONER
-----------------------------------------------------------------DAVID BALTO
Attorney at Law
1325 G Street, NW
Suite 500
Washington, DC 20005
202-577-5424
david.balto@dcantitrustlaw.com
Attorney for Amicus Curiae Consumer Action
================================================================
COCKLE LEGAL BRIEFS (800) 225-6964
WWW.COCKLELEGALBRIEFS.COM
i
TABLE OF CONTENTS
Page
TABLE OF AUTHORITIES .................................
ii
INTERESTS OF AMICUS CURIAE....................
1
SUMMARY OF ARGUMENT ..............................
3
ARGUMENT ........................................................
5
I.
THREE-TIER DISTRIBUTION SYSTEM
PROMOTES COMPETITION AND BENEFITS CONSUMERS ..................................
5
A. Background of Three-Tier Distribution
System ...................................................
5
B. Consumer Choice Explodes With ThreeTier Distribution System ......................
8
C. The Sixth Circuit’s Decision Undermines
the Three-Tier Distribution System and
Threatens To Reduce Competition and
Consumer Choice ................................... 17
II.
PRESERVING THE THREE-TIER DISTRIBUTION SYSTEM SERVES IMPORTANT
POLICY GOALS INCLUDING STRONG
CONSUMER PROTECTION ENFORCEMENT ........................................................... 20
CONCLUSION..................................................... 27
ii
TABLE OF AUTHORITIES
Page
CASES
Brown Shoe Co. v. United States, 370 U.S. 294
(1962) .......................................................................20
Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429
U.S. 477 (1977) ........................................................20
Cal. Retail Liquor Dealers Ass’n v. Midcal Aluminum, Inc., 445 U.S. 97 (1980) ................................6
Capital Cities Cable Inc. v. Crisp, 467 U.S. 691
(1984) .......................................................................26
Granholm v. Heald, 544 U.S. 460 (2005) ............ passim
North Dakota v. United States, 495 U.S. 423
(1990) ............................................................... passim
United States v. Frankfort Distilleries, 324 U.S.
293 (1945) ................................................................20
Ziffrin, Inc. v. Reeves, 308 U.S. 132 (1939) .................20
CONSTITUTIONAL PROVISIONS
U.S. Const. amend. XXI ...................................... passim
U.S. CONST. amend. XXI, § 2 .........................................7
RULES AND REGULATIONS
Rule 37.6 .......................................................................1
iii
TABLE OF AUTHORITIES – Continued
Page
OTHER AUTHORITIES
AEI website, available at http://www.aei.org/
publication/charts-of-the-day-welcome-to-thegolden-age-of-american-craft-beer/ .................. 10, 11
Alcohol Policy Information System website, available at https://alcoholpolicy.niaaa.nih.gov/.............23
American Craft Beer website, available at
https://www.americancraftbeer.com/the-goldenage-of-american-craft-beer/.....................................10
Andre Barlow, One Drink Too Many: Why Consumers Will Lose from the Latest Beer Merger,
Law 360 (Nov. 12, 2015) ............................................8
Andre Barlow, Right Distribution Is Key to Successful Beer Remedies, Law 360 (Jan. 27, 2016) .........6
Andrew Adams, Costco Wine Buyer Talks Shelf
Strategy, Wines & Vines, February 16, 2017,
available at https://www.winesandvines.com/
news/article/180732/Costco-Wine-Buyer-TalksShelf-Strategy .........................................................18
Anna King, States Consider Banning Alcoholic
Energy Drinks, NPR (Nov. 9, 2010) ........................22
Barry Lynn, Big Beer, A Moral Market, and Innovation, Harv. Bus. Rev. (2012) ...............................6
Bryan Pearson, Walmart Inventory Cuts, Forbes,
November 9, 2015, available at https://www.
forbes.com/sites/bryanpearson/2015/11/09/
walmart-inventory-cuts-5-ways-to-make-roomfor-the-best-shoppers/#51155b59378c ....................18
iv
TABLE OF AUTHORITIES – Continued
Page
Carie Wade Gervin, With wine in grocery stores
and a new head of the ABC, Tennesseans are
optimistic about the future of alcohol in the
state, Nashville Scene, June 30, 2016 .....................16
Center for Alcohol Policy, National Survey Finds
Americans Overwhelmingly Support the Current System of Alcohol Laws and Regulation
(2015), available at http://www.centerforalcohol
policy.org/2015/08/18/national-survey-findsamericans-very-satisfiedwith-current-alcohollaws-and-regulations-3/ (last visited Sept. 16,
2016) ........................................................................10
Chris Furnari, Brewers Association: Craft
Growth Slows to 5 Percent, BREWBOUND (Aug.
1, 2017, 4:58 PM), available at https://www.
brewbound.com/news/brewers-associationcraft-growth-slows-5-percent ..................................14
Cody Jennings, Predictions for Wine Industry
M&A in 2018 Success of the premium wine
segment should drive much of the activity
WINES AND VINES, available at https://www.
winesandvines.com/features/article/193821/
Predictions-for-Wine-Industry-M-and-A-in-2018,
January 2018...........................................................14
Danae King, Laws including high-proof grain
alcohol ban take effect Tuesday, Baltimore
Sun, June 30, 2014, available at https://www.
baltimoresun.com/news/maryland/bs-md-grainalcohol-illegal-tuesday-20140630-story.html .........23
v
TABLE OF AUTHORITIES – Continued
Page
Ed Marcum, USA Today, Tennessee grocery stores
say wine sales a success, March 17, 2017 ................16
Ensuring Competition Remains on Tap: The AB
InBev/SABMiller Merger and the State of
Competition in the Beer Industry: Hearing Before the Subcomm. on Antitrust, Competition
Policy and Consumer Rights of the S. Comm.
on the Judiciary, 114th Cong. (2015). (statement of Craig Purer, National Beer Wholesalers Association), available at https://www.
judiciary.senate.gov/imo/media/doc/12-08-15%20
Purser%20Testimony.pdf ........................................15
FTC Releases Fourth Major Study on Alcohol
Advertising and Industry Efforts to Reduce
Marketing to Underage Audiences, available
at https://www.ftc.gov/news-events/press-releases/
2014/03/ftc-releases-fourth-major-study-alcoholadvertising-industry. ...............................................19
Johns Hopkins Bloomberg School of Public
Health Press Release, Governor Signs Bill
Banning Extreme-Strength Alcohol in Maryland, May 5, 2014, available at https://www.
newswise.com/articles/view/617429/?sc=dwhr
&xy= 5047613 .........................................................22
Justice Department Requires Anheuser-Busch
InBev to Divest Stake in MillerCoors and Alter
Beer Distributor Practices as Part of SABMiller Acquisition, Department of Justice Press
Release, July 20, 2016 .............................................10
vi
TABLE OF AUTHORITIES – Continued
Page
Kara Newman, Craft Distilleries Growth Continues, Wine Magazine, September 27, 2018..........14
Karen McVeigh, Toxic and untaxed: perils of
global trade in bootleg liquor exposed, Guardian, June 11, 2018, available at https://www.
theguardian.com/globaldevelopment/2018/jun/
11/bootleg-liquor-africa-latin-america....................24
KPMG, An Analysis of the Structure and Administration of State and Local Taxes on the Distribution and Sale of Beer, NBWA (2009) and
update in 2014, available at https://www.nbwa.
org/resources/kpmg-tax-study-state-and-localtaxes-distribution-and-sale-beer-0 .........................21
Lee Murphy, Walgreens Beverage Alcohol Powerhouse, Shaken News Daily, August 22, 2017,
available at http://www.shankennewsdaily.com/
index.php/2017/08/22/19048/walgreens-beveragealcohol-powerhouse/ ................................................18
Mack Burke, Four states watching Oklahoma
closely as lawmakers push liquor law overhaul, Norman Transcript, October 9, 2015,
available at https://www.normantranscript.com/
news/four-states-watching-oklahoma-closelyas-lawmakers-push-liquor-law/article_d4058ece6c48-11e5-abd7-67860a35ccb7.html ......................17
National Institute on Alcohol Abuse and Alcoholism, available at https://www.niaaa.nih.gov/
alcohol-health/overview-alcohol-consumption/
alcohol-facts-and-statistics .....................................25
vii
TABLE OF AUTHORITIES – Continued
Page
Neil Houghton and Marin Gjaja, For Small and
Large Brewers, the U.S. Market Is Open, Boston Consulting Group, June 19, 2014, available at https://www.bcg.com/publications/2014/
consumer-products-for-small-large-brewers-usmarket-open.aspx.............................................. 14, 15
Number of Breweries, BREWERS ASSOCIATION.ORG,
https://www.brewersassociation.org/statistics/
number-of-breweries/ ..............................................14
Pamela S. Erikson, Safe and Sound (Campaign
for a Healthy Alcohol Marketplace), available
at http://www.nabca.org/assets/Docs/Research/
Studies/SafeandSound.pdf ........................................8
Presidential Proclamation 2065 of December 5,
1933, available at https://catalog.archives.gov/
id/299967/3/public?contributionType=tag ............ 6, 7
Raymond B. Fosdick & Albert L. Scott, Toward
Liquor Control ...........................................................7
Robert M. Tobiassen, The Fake Alcohol Situation
in the United States, Federal Regulatory and
Compliance Consultant (2014), available at https://
www.centerforalcoholpolicy.org/wp-content/
uploads/2015/04/The_Fake_Alcohol_Situation_
in_the_United-States_compressed.pdf ...................24
Size and Shape of the Global Illicit Alcohol Market, Euromonitor, November 6, 2018, available
at https://www.securingindustry.com/food-andbeverage/a-quarter-of-alcohol-is-illicit-inemerging-markets-report/s104/a8779/#.W-YHH
pNKhaQ...................................................................23
viii
TABLE OF AUTHORITIES – Continued
Page
The Alcohol Tobacco Trade and Tax Annual Report, Fiscal Year 2017, available at https://www.
ttb.gov/foia/pdf/ttbar2017.pdf ...................................9
1
INTEREST OF AMICUS CURIAE
Consumer Action has been a champion of underrepresented consumers nationwide for forty-seven
years.1 As a national non-profit 501(c)(3) organization,
Consumer Action focuses on consumer education that
empowers low-and moderate-income and limitedEnglish-speaking consumers to financially prosper. It
also advocates for consumers to advance consumer
rights and promote change. Consumer Action knows
through its advocacy work that many consumers are
subjected to unlawful, unfair, or deceptive business
practices. Consumer Action was the leading voice to
protect consumers through the passage of “lemon
laws.” Consumer Action helps consumers assert their
rights in the marketplace and make financially savvy
choices by providing consumer education materials in
multiple languages, a free national hotline, a comprehensive website (www.consumer-action.org) and annual surveys of financial and consumer services. Over
7,000 community and grassroots organizations benefit
annually from its extensive outreach programs, training materials and support.
The organization achieves its mission through
several channels, from direct consumer education to
1
Pursuant to Rule 37.6, Consumer Action states that all parties through their respective counsels filed blanket consents to
anyone who wanted to file an Amicus brief. No party or party’s
counsel authored this brief in whole or in part or contributed
money intended to fund its preparation or submittal. No person
other than Amicus or their members contributed money to fund
its preparation or submittal.
2
issue-focused advocacy. As representatives of the public interest, Consumer Action submits this brief to provide its perspective on the potential impact of this
Court’s decision regarding Tennessee’s durational residency requirements on the ability of states to regulate
their alcohol markets, which will impact competition,
consumers, as well as the welfare and safety of the
public. All 50 states currently regulate the alcoholic
beverage industry within their states. By constitutional design, each state was granted the authority to
impose different laws and regulations on the industry
so the laws and regulations regarding the distribution
of alcohol are not uniform. That said, virtually all of
the states operate a three-tier distribution system that
is vital to promoting consumer protection and enhancing competition. Many states have durational residency requirements for new license applicants in the
retail tier of the three-tier distribution system, which
serves numerous public benefits such as keeping the
public safe, encouraging responsible consumption, prohibiting underage and excessive drinking, and raising
revenue. Millions of consumers drink beer, wine and
spirits every day. Those consumers value the benefits
of state regulation that ensures their safety and protects competition, resulting in increased innovation
and greater variety of choice.
Importantly, the Sixth Circuit decision that durational residency requirements violate the dormant
Commerce Clause undermines the three-tier distribution system, diminishes states’ authority to regulate
the distribution and sales of alcoholic beverages, and
3
threatens to reduce competition and consumer choice.
The Sixth Circuit’s decision affects the ability of states
to make important decisions relating to the welfare
and safety of their local consumers of alcohol and the
economic structure of the alcoholic beverage industry
within their own borders. The Sixth Circuit’s decision
will result in deregulation of the alcoholic beverage industry in individual states potentially allowing dominant corporations to exert greater influence over the
retail sector throughout the United States. If the decision stands, it will disrupt the markets in which all of
these small businesses (distributorships, retailers,
craft brewers, wineries, and distilleries) operate. Any
sudden judicial disruption of the status quo is of considerable concern to consumers. As a result, customers
have a special interest that is not already directly represented by the parties to this litigation, and why we
respectfully request this Court to consider this proposed Amicus brief and the implications for consumers.
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SUMMARY OF ARGUMENT
Amicus curiae Consumer Action submits this
brief in support of Petitioner. The Tennessee law and
alcohol laws like it across the country help spur competition, protect consumer choice and foster consumer
protection. Tennessee, like many states, has a “threetier” distribution system for alcohol that separately
regulates (1) producers of beer, wine and liquor, (2)
wholesalers, and (3) retailers that sell directly to consumers. Under Tennessee law, there is a two-year
4
residency requirement for the initial license of a retailer that is now being scrutinized by this Court.
Amicus fully supports Petitioner’s arguments on
why Tennessee’s two-year durational residency requirement for the initial license of a retailer is constitutional. Amicus writes separately to highlight how
the Sixth Circuit’s decision will harm small businesses
and consumers. Tennessee’s right to license and regulate local retailers is fundamental to its authority to
establish and regulate a three-tier distribution system.
Tennessee’s residency requirement should be upheld
for the following reasons. First, this Court should
follow its own precedent and uphold the state’s complete authority and right to regulate a three-tier
distribution system within its borders because it undoubtedly has benefitted competition and consumers
across the country. The Sixth Circuit’s decision conflicts with this Court’s reasoning in Granholm v.
Heald, 544 U.S. 460 (2005), undermines the three-tier
distribution system, harms competition and reduces
consumer choice. The Sixth Circuit’s decision will damage the businesses of small craft brewers, importers,
wineries, and craft distillers, and ultimately result
in less variety for consumers. Keeping the three-tier
system in place is vital to promoting competition
among distributors, retailers, brewers, wineries, and
distillers and to continuing the explosive growth of
new products that increases diversity of products
for consumers. Second, preserving the three-tier
system serves important policy goals related to protecting competition, promoting economic efficiency,
strengthening consumer protection enforcement, and
5
protecting the welfare, health, and safety of the public.
The Sixth Circuit’s flawed decision threatens to disrupt the competitive landscape, damage the structure
of the alcohol distribution markets, weaken states’
consumer protection enforcement capabilities, and reduce consumer confidence as health and safety risks
increase. Third, Amicus fully supports Petitioner’s arguments and reasoning that Tennessee’s two-year durational-residency requirement is constitutional and
further states that it does not violate the dormant
Commerce Clause because it does not treat out-of-state
producers of alcoholic beverages differently than instate producers and the law is a reasonable means of
ensuring that the companies that obtain licenses to
sell alcoholic beverages to consumers within its state
and local areas know and are invested in the welfare
of the local community they serve. Granholm expressly
recognized the importance of the three-tier distribution system, which allows states to make decisions on
who may sell alcohol to its in-state consumers.
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ARGUMENT
I.
THREE-TIER DISTRIBUTION SYSTEM
PROMOTES COMPETITION AND BENEFITS CONSUMERS
A. Background of Three-Tier Distribution
System
The U.S. alcoholic beverage industry is complex
and highly regulated. Under the Twenty-first Amendment, the states have plenary authority to regulate the
6
sale and distribution of alcohol within their borders,
including regulation of vertical relationships of alcohol
companies through a three-tier distribution system of
licensed and structurally separate producers, distributors, and retailers. Granholm v. Heald, 544 U.S. 460,
466, 473 (2005); North Dakota v. United States, 495
U.S. 423, 432 (1990); Cal. Retail Liquor Dealers Ass’n
v. Midcal Aluminum, Inc., 445 U.S. 97, 110 (1980).
The state laws, which allow for this regulation, came
about after the repeal of Prohibition.2 The Eighteenth
Amendment to the Constitution, normally referred to
as Prohibition, was in part a reaction to the system of
“tied houses” that dominated the alcohol retail market.3 Before Prohibition, producers of spirits and beer
served small geographic areas and frequently either
fully or partially owned the retail outlets. At the time,
these brewers and distillers exerted exclusive control
over retailers and used that control to pressure sales
without concern for the safety or welfare of customers
or the general public. The federal government was
concerned with these “tied house” practices that resulted in producers of alcohol having control over retailers to favor their own brands and to engage in illicit
behavior.4
2
Andre Barlow, Right Distribution Is Key to Successful Beer
Remedies, Law 360 (Jan. 27, 2016); Barry Lynn, Big Beer, A Moral
Market, and Innovation, Harv. Bus. Rev. (2012).
3
Barlow, supra note 2; Lynn, supra note 2.
4
Presidential Proclamation 2065 of December 5, 1933, in
which President Franklin D. Roosevelt announces the Repeal of
Prohibition. (President Roosevelt’s official proclamation to the nation strongly shows the federal government was giving states
7
When Prohibition was repealed through Section 1
of the Twenty-first Amendment, the 50 states were
tasked with putting in place systems that would prevent a repeat of this harmful state of affairs. Section 2
of the Twenty-first Amendment provides that “[t]he
transportation or importation into any State, Territory,
or possession of the United States for delivery or use
therein of intoxicating liquors, in violation of the laws
thereof, is hereby prohibited.” U.S. CONST. amend. XXI,
§ 2. In other words, a state may prohibit the vertical
integration of producers, wholesalers, and retailers to
control the sale of alcohol within its borders. See North
Dakota at 428, 432.
Each state took up this challenge to create its own
regulatory framework, which resulted in 50 different
state alcohol marketplaces rather than a nationally
regulated one. The thought was that a verticallyintegrated system has “all the vices of absentee ownership. The manufacturer knew nothing and cared
nothing about the community. All he wanted was increased sales. He saw none of the abuses, and as a
non-resident he was beyond local influence.”5 Many of
the states created three-tier distribution systems
where producers including brewers, wineries, and distillers sell to licensed wholesalers and distributors,
which then market and sell the alcoholic beverages to
every tool to fight the return of the tied house). Available at
https://catalog.archives.gov/id/299967/3/public?contributionType=
tag.
5
See Raymond B. Fosdick & Albert L. Scott, Toward Liquor
Control (republished by Center for Alcohol Policy 2011).
8
independent, licensed off-premise (i.e., grocery and
convenience stores) and on-premise (i.e., restaurants
and taverns) retailers, which market and sell to consumers.6 The result is a three-tier system, which restricts licensed producers, distributors, and retailers to
their respective service functions with the practical
goal of ensuring that no producer or seller of alcohol
could become powerful enough to force its products
onto consumers in local communities. This Court has
expressly recognized that “the three-tier system itself
is ‘unquestionably legitimate.’ ” Granholm at 466
(quoting North Dakota at 432).
B. Consumer Choice Explodes With ThreeTier Distribution System
As a result of the three-tier system, consumer
choice has exploded. It was put in place to prevent producers of beer, wine, and spirits from having too much
control over what consumers purchase. The divided
structure “prevents marketplace domination by large
companies that would seek to greatly increase alcohol
sales through aggressive practices, or by controlling
the entire alcohol distribution chain.”7 Alcohol regulation, unlike other industry regulations, actually increases diversity of product on retail store shelves and
in restaurants, bars, and liquor stores. Independent
6
Andre Barlow, One Drink Too Many: Why Consumers Will
Lose from the Latest Beer Merger, Law 360 (Nov. 12, 2015).
7
Pamela S. Erikson, Safe and Sound at 2 (Campaign for a
Healthy Alcohol Marketplace), available at http://www.nabca.
org/assets/Docs/Research/Studies/SafeandSound.pdf.
9
distributors and retailers sell beer, wine, and spirits
driven by consumer demand when they are not beholden to powerful alcohol producers. As a result, retailers can sell an array of products and allow
consumers to seek out whatever beer, wine, or spirit
they most prefer.
By eliminating the manufacturer’s ownership interest, distributors and retailers are free to take on additional brands, which has created a market for and
spurred the growth of small craft brewers, wineries,
and craft distillers. Indeed, the alcohol beverage market has consistently provided incredible variety and
choice to legal drinking age consumers.
According to data from the U.S. Alcohol Tobacco
Tax and Trade Bureau (“ATTB”) Annual Report, the
ATTB has approved over 1.1 million label applications
for beer, wine and spirits brands over the past eight
years. These new labels are in addition to the established and well-known alcohol beverage brands from
years prior to 2010. These 1.1 million labels represent
the opportunity that brewers, vintners, and distillers
see in the existing regulatory environment of the current alcohol beverage marketplace.8 Besides the evidence from the ATTB regarding the release of new
beverages, consumers believe that an abundance of
choices exist. To be sure, ninety-one percent of those
surveyed in a bipartisan national survey agreed that it
was easy for them to find a variety of alcoholic
8
The Alcohol Tobacco Trade and Tax Annual Report, Fiscal
Year 2017, available at https://www.ttb.gov/foia/pdf/ttbar2017.pdf.
10
beverages in their communities, and 84 percent agreed
that there are more local and imported beers and liquors available than ever before.9
The flood of new varieties from craft brewers has
occurred while two giants control over 70 percent of the
beer production in the United States and in some areas
of the country the combined shares are in excess of 90
percent.10 This seeming paradox can be attributed to
50 different state regulatory regimes that oversee their
markets. Craft brewers have met stiff competition and
resistance from large established companies, yet they
have been expanding. The vibrancy of the craft brew
industry is directly related to the market structure
that was created by the states and their decisions to
keep wholesalers and retailers free from influence of
powerful giants. Make no mistake, this “golden age of
beer” is a result of state regulation.11
9
Center for Alcohol Policy, National Survey Finds Americans
Overwhelmingly Support the Current System of Alcohol Laws
and Regulation (2015) (“National Survey”), available at http://
www.centerforalcoholpolicy.org/2015/08/18/national-survey-findsamericans-very-satisfiedwith-current-alcohol-laws-and-regulations3/ (last visited Sept. 16, 2016). The national survey of 1,005 adults
over the age of 21 was conducted using an online methodology by
a bipartisan team of pollsters, Whitman Insight Strategies and
WPA Opinion Research, on behalf of the Center for Alcohol Policy
from April 27–May 3, 2015. The margin of error is ± 3.1%.
10
Justice Department Requires Anheuser-Busch InBev to Divest Stake in MillerCoors and Alter Beer Distributor Practices as
Part of SABMiller Acquisition, Department of Justice Press Release, July 20, 2016.
11
See American Craft Beer website, available at https://www.
americancraftbeer.com/the-golden-age-of-american-craft-beer/; AEI
11
The three-tier distribution system, in particular,
has become the safety valve that keeps beer markets
competitive as the United States Department of Justice’s Antitrust Division (“DOJ”) demonstrated in its
challenge to Anheuser-Busch InBev’s (“ABI”) acquisition of SABMiller. In that action, the DOJ made clear
that “[e]ffective distribution is important for a brewer
to be competitive in the beer industry.”12 Because there
are only two beer distributors of scale in most local
markets, the DOJ alleged that the merger of the two
largest global brewers “would increase ABI’s incentive
and ability to disadvantage its beer rivals by impeding
the distribution of its beers.”13 The concern was that
ABI could use its market power at the supplier level to
exert a tremendous amount of influence over what
beer wholesalers/distributors carry and what retailers
would sell. The DOJ found in its investigation that new
entry from craft brewers, which worked with independent distributors and retailers, led to an increase in innovation and consumer choice as new beers with a
wide range of unique styles and tastes were being introduced to consumers every day.
The DOJ, however, recognized that small breweries cannot grow in scale and effectively compete without access to efficient beer distribution networks.
website, available at http://www.aei.org/publication/charts-of-theday-welcome-to-the-golden-age-of-american-craft-beer/.
12
United States v. Anheuser-Busch InBev and SABMiller, plc,
Competitive Impact Statement 8 (July 20, 2016).
13
United States v. Anheuser-Busch InBev and SABMiller, plc,
Compl. ¶ 7, 45–47 (July 20, 2016).
12
Accordingly, the DOJ entered into a consent decree
that requires ABI to engage in certain conduct going
forward that will promote distributor freedom, cap its
ability to grow its own distribution business, and submit to oversight for the next eight years, all in an effort
to protect the growth of the craft brew industry in furtherance of state regulatory goals.14
The federal government’s consent order regulating ABI’s day-to-day conduct is noteworthy for three
reasons. First, it shows that the goals and purposes
that motivated the creation of the three-tiered distribution networks are still relevant to the industry today. Second, the DOJ felt compelled to limit a large
brewer’s ability to increase its control over distribution
to keep the beer market competitive. Third, the bottom
line for the DOJ is that consumers are better off when
they have more choices via independent distribution of
scale.
Importantly, there is no one-size overarching alcohol policy for the United States. The last one-size-fitsall federal solution was the 18th Amendment which
imposed National Prohibition. That one-size-fits-all
approach was replaced with a 50-size approach combined with federal laws. This court in Granholm implicitly recognizes this by noting states can “funnel
sales through the three-tier system.” Granholm, 544
U.S. at 488–89. Each state determines whether and
how to funnel sales through its distribution system.
14
United States v. Anheuser-Busch InBev and SABMiller, plc,
Final Judgment, Civil Action No. 1:16-cv-0148 (Oct. 22, 2018).
13
This “funnel” process of each state’s three-tier system
was recognized by the DOJ as important. Hence, its
consent order requires that the distribution funnel remain open to the tremendous variety of breweries (domestic and import) seeking to sell to retailers in the
United States. State laws such as physical presence or
residency are all tools in the tool chest to help states
make this system open.
Local producers (i.e., craft beer, local wineries, and
craft distilleries), wholesalers and retailers are more
amenable to state and local regulation and are more
accountable to their local communities. By separating
the tiers, states have allowed for competition to flourish, which has resulted in the availability of a diversity
of products. As small brewers, wineries, and distillers
bottle a wide variety of alcoholic beverages, consumers
have a plethora of craft beer, wine, and spirit options
from which to choose. This diversity has been enhanced as the states have reduced the economic incentives for wholesalers and retailers to favor the
products of large corporate suppliers to the exclusion
of small mom-and-pop producers.
Unquestionably, state alcohol regulation has promoted competition spurring the growth of small
businesses. Indeed, today’s craft beer, winery, and distillery renaissance in the United States was made possible by the complex regulations that exist in many of
the 50 states. The craft beer, wine, and craft distillery
industries have experienced tremendous growth under
the current system. The craft brew industry grew by
double digits from 2004 to 2015 and there are now
14
approximately 6,000+ craft breweries in the United
States, more than at any other time in history.15 Since
1995, the number of U.S. wineries has grown more
than five-fold, from approximately 1,800 to 9,200.16
And the craft distillery industry is also experiencing
incredible growth as the number of active craft distillers grew from 200 local distilleries in 2005 to 1,835 as
of August 2018.17
A Boston Group Consulting (“BGC”) study demonstrates how the open independent distribution system
helped entrepreneurial craft brewers increase market
share over a 14-year period of time when overall beer
sales remained flat.18 The BGC study explains that
small craft brewers were able to enter and grow
15
See Chris Furnari, Brewers Association: Craft Growth Slows
to 5 Percent, BREWBOUND (Aug. 1, 2017, 4:58 PM), available at
https://www.brewbound.com/news/brewers-association-craft-growthslows-5-percent; Number of Breweries, BREWERS ASSOCIATION.ORG,
available at https://www.brewersassociation.org/statistics/numberof-breweries/.
16
Cody Jennings, Predictions for Wine Industry M&A in 2018
Success of the premium wine segment should drive much of the
activity WINES AND VINES, available at https://www.winesandvines.
com/features/article/193821/Predictions-for-Wine-Industry-M-andA-in-2018, January 2018.
17
Kara Newman, Craft Distilleries Growth Continues, Wine
Magazine, September 27, 2018. The data comes from The Craft
Spirits Data Project, a study led in conjunction with the ACSA,
the International Wine and Spirits Research (IWSR) and advisory
services consultancy Park Street. Lisa Rabasca Roepe, Sage, Craft
Distillers, August 27, 2018.
18
Neil Houghton and Marin Gjaja, For Small and Large
Brewers, the U.S. Market Is Open, Boston Consulting Group, June
19, 2014, available at https://www.bcg.com/publications/2014/
consumer-products-for-small-large-brewers-us-market-open.aspx.
15
because the states required an open and independent
distribution and how they would have had a difficult
time affording all the warehouses and trucks needed
to distribute beer over wide territories on their own.
Without independent distributors, small brewers
would mostly be limited to distributing in a very limited geographic area. Independent distributors make
warehousing and trucking more efficient by aggregating all the various brands. The BGC study compared
the brewing industry to direct store delivery (“DSD”)
categories and determined that state regulation made
the brewing industry more competitive than the unregulated markets where large DSDs have a significant competitive advantage in DSD categories such as
ice cream, soda, and snacks.19 The BGC study notes
that the three-tier distribution protections prevent the
two powerful breweries from using their scale to extract advantages from the distribution system the way
that powerful DSD suppliers dominate in other product categories.20 By comparison, note how Coke and
Pepsi dominate the soda aisles in many grocery stores,
whereas beer offerings generally extend beyond just
ABI and MillerCoors products.21
19
Id.
Id.
21
See Ensuring Competition Remains on Tap: The AB InBev/SABMiller Merger and the State of Competition in the Beer
Industry: Hearing Before the Subcomm. on Antitrust, Competition
Policy and Consumer Rights of the S. Comm. on the Judiciary,
114th Cong. (2015). (statement of Craig Purer, National Beer
Wholesalers Association) available at https://www.judiciary.
senate.gov/imo/media/doc/12-08-15%20Purser%20Testimony.pdf.
20
16
To be sure, nothing in the record indicates that
Tennessee’s alcoholic beverage industry, the wholesale
tier, and the retail tier are not competitive or that consumers have been harmed by its durational residency
requirements. On the contrary, the facts suggest that
Tennessee has a strong alcohol beverage retail industry.22 According to a press report in 2016, the number
of new liquors-by-the-drink licenses has gone up every
year since 2009.23 In Tennessee, “[t]here are more distilleries every year, more local wineries, more breweries and more breweries making high-gravity beer.
There are more wholesalers too, which means more
products in more places.”24 In short, Tennessee’s alcoholic beverage market appears to be competitive indeed. In summary, the alcoholic beverage industry is
one of the most highly regulated industries in the
United States, but the Tennessee and U.S. national alcoholic beverage markets are healthier than unregulated markets, which are characterized by large
dominant players without any substantial growth of
small businesses.
22
Ed Marcum, USA Today, Tennessee grocery stores say wine
sales a success, March 17, 2017; Carie Wade Gervin, With wine in
grocery stores and a new head of the ABC, Tennesseans are optimistic about the future of alcohol in the state, Nashville Scene,
June 30, 2016.
23
Carie Gervin, Tennesseans are optimistic about the future
of alcohol in the state.
24
Carie Gervin, Tennesseans are optimistic about the future
of alcohol in the state.
17
C. The Sixth Circuit’s Decision Undermines
the Three-Tier Distribution System and
Threatens To Reduce Competition and
Consumer Choice
The Sixth Circuit’s decision conflicts with this
Court’s reasoning in Granholm and undermines the
three-tier distribution system, which if it stands, will
harm competition and reduce consumer choice. The
Sixth Circuit’s decision undercuts Tennessee’s right
under the Twenty-first Amendment to structure the alcoholic beverage distribution system within the state
and, specifically, to create a three-tier distribution system that balances a number of public policy goals including the prevention of large firms from dominating
local markets through vertical integration and promotion of competition. Its decision, if applied throughout
the United States, would disrupt the markets in which
beer brewers and importers, wineries, craft distillers,
distributors and retailers currently operate, allowing
dominant corporations to exert greater influence over
the sale of alcoholic beverages to consumers. This will
undoubtedly stifle competition and reduce consumer
choice.
The sobering truth is that large big box retail
chains, such as Costco, Total Wine, Walmart, national
grocery stores, such as Safeway, and national retail
pharmacies such as Walgreens, typically sell the most
fast-moving products so they carry a limited number
of SKUs (stock keeping units).25 Although there are
25
Mack Burke, Four states watching Oklahoma closely as lawmakers push liquor law overhaul, Norman Transcript, October 9,
18
now more than 9,000 wineries in the United States, the
typical Costco location only carries 235 SKUs, which
also includes beer and spirits in places where regulations allow all three to be sold in the same location.26
Walgreens has a very targeted approach as it only
stocks 150 SKUs for wine, 50 for spirits, and 35 for
beer.27 In other words, markets dominated by large corporations actually offer less choice not more. They
make centralized purchasing decisions, a dynamic
that makes it difficult for smaller alcoholic beverage
producers to sell their products to large retail chains’
customers. Moreover, large retailers have limited refrigerator and shelf space, so it is difficult for smaller
producers to compete with larger producers and more
recognized brands for the display of their products. In
addition, dominant producers have increased their expenditures for point of sale marketing in retail establishments so that their brands will be promoted in the
2015, available at https://www.normantranscript.com/news/fourstates-watching-oklahoma-closely-as-lawmakers-push-liquor-law/
article_d4058ece-6c48-11e5-abd7-67860a35ccb7.html; Bryan Pearson,
Walmart Inventory Cuts, Forbes, November 9, 2015, available at
https://www.forbes.com/sites/bryanpearson/2015/11/09/walmartinventory-cuts-5-ways-to-make-room-for-the-best-shoppers/#511
55b59378c.
26
Andrew Adams, Costco Wine Buyer Talks Shelf Strategy,
Wines & Vines, February 16, 2017, available at https://www.wines
andvines.com/news/article/180732/Costco-Wine-Buyer-Talks-ShelfStrategy.
27
Lee Murphy, Walgreens Beverage Alcohol Powerhouse,
Shaken News Daily, August 22, 2017, available at http://www.
shankennewsdaily.com/index.php/2017/08/22/19048/walgreensbeverage-alcohol-powerhouse/.
19
store.28 Accordingly, smaller producers have difficulty
getting large retailers to display their products and as
the three-tier system is weakened so will the protections that have allowed small businesses to grow and
consumers to choose from a variety of products.
In contrast, the result of the three-tier distribution
system throughout the United States and in Tennessee, specifically, is that the alcoholic beverage industry
is diverse, characterized by a wealth of consumer
choice of products at various price points. Today, local
small producers of alcohol currently have access to distributors, retailers, and consumers. The astonishing
growth at the producer level suggests that competition
has increased and that consumers have been the beneficiaries of that competition in the form of innovative
products at relatively lower prices.
Moreover, the record is devoid of any facts to support any claim that there is some form of consumer
harm present in Tennessee. The only claim from Respondents is that an out-of-state retailer may be excluded because the state requires that any retailer
applying for a liquor license must be a resident of the
state for a certain period of time. Again, the public policy goal behind the durational residency requirement
is to make sure that all licensed retailers know and are
vested in the local community that they serve. While
28
FTC Releases Fourth Major Study on Alcohol Advertising
and Industry Efforts to Reduce Marketing to Underage Audiences, available at https://www.ftc.gov/news-events/press-releases/
2014/03/ftc-releases-fourth-major-study-alcohol-advertisingindustry.
20
state licensing requirements and the antitrust laws
have different goals, it is worth noting that the purpose
of the antitrust laws is to protect competition not competitors. Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc.,
429 U.S. 477, 488 (1977) (citing Brown Shoe Co. v.
United States, 370 U.S. 294, 320 (1962)). Tennessee’s
interests in regulating what firms are selling alcohol
directly to consumers within its state are much more
important, let alone germane, than an out-of-state big
box retailer, which is concerned about profits, having
the ability to sell alcohol within the state. Without the
three-tier system, Tennessee and U.S. consumers
would likely lose out on the innovation, variety, and
choice that exists today.
II.
PRESERVING THE THREE-TIER DISTRIBUTION SYSTEM SERVES IMPORTANT
POLICY GOALS INCLUDING STRONG CONSUMER PROTECTION ENFORCEMENT
Indisputably, the states were given the power to
regulate the sale and distribution of alcohol within
their borders. North Dakota v. United States, 495 U.S.
423, 432 (1986); Ziffrin, Inc. v. Reeves, 308 U.S. 132, 138
(1939) (noting that the Twenty-first Amendment sanctions the state the right to prohibit the production, distribution, or sale of liquor); and United States v.
Frankfort Distilleries, 324 U.S. 293, 299 (1945) (noting
that the Twenty-first Amendment “bestowed upon the
states broad regulatory power over the liquor traffic
within their territories”). Each state adopted comprehensive rules and regulations that resulted in 50
21
different regulatory frameworks and markets for alcoholic beverage companies. The goal of state alcohol regulation is to protect the welfare, health, peace, morals
and safety of the public by “promoting temperance,
ensuring orderly market conditions, and raising revenue.” North Dakota, 495 U.S. at 432. Alcohol regulation
attempts to balance appropriate control over licensed
producers, distributors and retailers with robust
competition. The states and local governments make
decisions that are based on their own community
norms and standards. Thus, while states may have
different views on how to regulate the production,
transportation, distribution and sale of alcohol within
their borders—Utah and California, for example,
surely have distinct perspectives on how to organize
this endeavor—each state should be allowed to make
these decisions.
The three-tier system offers many economic
benefits to society. First, it results in tax revenue to
the federal, state, and local governments.29 Second, it
promotes small entrepreneurial businesses. For small
producers (craft brewers, small wineries, and craft distilleries), they are given equal access to the marketplace that they would not receive without state
regulation, which allows sales of their products to a
wider range of consumers. They are allowed to compete
29
KPMG, An Analysis of the Structure and Administration of
State and Local Taxes on the Distribution and Sale of Beer, NBWA
(2009) and update in 2014, available at https://www.nbwa.org/
resources/kpmg-tax-study-state-and-local-taxes-distribution-andsale-beer-0.
22
on a level playing field. Third, consumers have more
choices to a variety of alcoholic products. Fourth, it is a
win-win proposition that has resulted in procompetitive effects.
The three-tier system also attempts to minimize
public health and safety risks. First, these laws and
regulations provide safeguards for the safe handling of
alcoholic beverages before they get to consumers.
North Dakota, 495 U.S. at 432–33. This regulatory
framework increases consumer confidence because
only licensed distributors and retailers are able to provide and sell alcoholic beverages. It makes producers,
wholesalers, and retailers accountable to local communities. Second, the system fosters controlled and accountable sales of alcohol. Third, the system also
prevents the marketplace from being dominated by
major companies that can use deceptive marketing
tactics to increase alcohol sales causing customers to
overdrink and overspend on alcohol, which creates numerous public health issues. Fourth, each state can do
what it wants to set up a system to protect consumers.
A state can test a product and/or decide not to allow
the sale or listing of a product. For example, some
states have prohibited the sale of grain alcohol or alcoholic energy drinks prior to any intervention by the
federal government.30
30
Anna King, States Consider Banning Alcoholic Energy
Drinks, NPR (Nov. 9, 2010); Johns Hopkins Bloomberg School of
Public Health Press Release, Governor Signs Bill Banning
Extreme-Strength Alcohol in Maryland, May 5, 2014, available at
https://www.newswise.com/articles/view/617429/?sc=dwhr&xy=
23
Moreover, consumer protection efforts are enhanced
by the three-tier distribution system. Consumer Action
is consistently on the front line in protecting consumers from deceptive and fraudulent conduct, so it believes that consumer protection efforts should be
strengthened not weakened especially with regards to
the alcoholic beverage industry. Because of significant
federal and state regulation, the alcohol beverage industry in the United States is relatively safe. The
three-tier system prohibits the sale of contaminated alcohol and ensures that producers, wholesalers, and retailers meet certain safety and quality standards.
Unfortunately, that is not the case in most of the world.
Euromonitor recently released a report entitled “Size
and Shape of the Global Illicit Alcohol Market” indicating that 25 percent of the alcohol sold around the world
is illicit.31 Indeed, other countries do not have the same
heightened scrutiny, controls, and regulations that the
50 states within the United States employ, so those
countries face credibility issues and real health and
safety risks especially in Africa and Latin America
where it is estimated that up to half of all alcoholic
5047613; Danae King, Laws including high-proof grain alcohol
ban take effect Tuesday, Baltimore Sun, June 30, 2014, available
at https://www.baltimoresun.com/news/maryland/bs-md-grainalcohol-illegal-tuesday-20140630-story.html; Alcohol Policy Information System website available at https://alcoholpolicy.niaaa.
nih.gov/.
31
Size and Shape of the Global Illicit Alcohol Market, Euromonitor, November 6, 2018, available at https://www.securing
industry.com/food-and-beverage/a-quarter-of-alcohol-is-illicit-inemerging-markets-report/s104/a8779/#.W-YHHpNKhaQ.
24
drinks are illicit.32 Furthermore, the Euromonitor Report concluded that there are five main factors driving
the illicit trade in alcohol, including low awareness of
the risks, low prices driving demand, inadequate regulation that can encourage the illicit market, a lack of
enforcement, and poorly-regulated distribution channels. Fortunately, in the United States, there is strong
state regulation of the wholesale and retail tiers and
interlocking state laws that prevent monopolies in alcohol sales and minimize the risks of counterfeit,
tainted, bootleg, or illegal alcohol being sold in our local
communities.33
The Court’s most recent opinion regarding the
three-tier distribution system refused to retreat from
this long history of state control: “The Twenty-first
Amendment grants the States virtually complete control over whether to permit importation or sale of liquor and how to structure the liquor distribution
system. A State which chooses to ban the sale and consumption of alcohol altogether could bar its importation; and, as our history shows, it would have to do so
to make its laws effective. States may also assume direct control of liquor distribution through state-run
32
Karen McVeigh, Toxic and untaxed: perils of global trade
in bootleg liquor exposed, Guardian, June 11, 2018, available at
https://www.theguardian.com/globaldevelopment/2018/jun/11/
bootleg-liquor-africa-latin-america.
33
Robert M. Tobiassen, The Fake Alcohol Situation in the
United States, Federal Regulatory and Compliance Consultant
(2014), available at https://www.centerforalcoholpolicy.org/wpcontent/uploads/2015/04/The_Fake_Alcohol_Situation_in_the_
United-States_compressed.pdf.
25
outlets.” Granholm, 544 U.S. at 488–89. If a state can
decide to ban sales and assume direct control and operate its own state-run outlets, it surely has the authority to determine what firms will have the privilege
of selling alcohol to its citizens. This Court further explained: “[T]he aim of the Twenty-first Amendment
was to allow States to maintain an effective and uniform system for controlling liquor by regulating its
transportation, importation, and use.” Granholm, at
484–85 (emphasis added).
While America’s state-based, three-tier distribution system provides consumers with some accountability, certainty, and reliability regarding the sale of
alcoholic beverages, the Sixth Circuit’s decision invalidating Tennessee’s durational residency requirement
threatens the status quo. Special economic interests
including large, big box retailers such as Respondent
Total Wine, are seeking to deregulate alcohol through
litigation. The result could be a reduction in a state’s
ability to control alcohol effectively. The rationale of
the durational residency requirement for new license
applicants is to make sure that new licensees know the
local market, are accountable to the local community,
and will encourage restrained and non-excessive alcohol consumption. Because of alcohol’s well-known externalities, the state knows that the greatest output of
alcohol is not the optimal goal of regulation.34
34
National Institute on Alcohol Abuse and Alcoholism, available at https://www.niaaa.nih.gov/alcohol-health/overview-alcoholconsumption/alcohol-facts-and-statistics.
26
In summary, Granholm expressly recognized the
importance of the three-tier distribution system, which
allows states to prohibit and control the sale of alcohol,
and license in-state retailers who will be selling alcohol to its in-state consumers. The three-tier system
promotes competition and economic efficiency, while
minimizing the health and social risks. Keeping the
three-tier system in place is vital to keeping consumers
safe. It serves as a framework for effective regulation,
which has benefitted consumers, producers and society
as a whole. Americans understand that alcohol is different from other commodities. The sale of alcohol
must be regulated to reduce the chances of abusive excessive consumption, underaged drinking, and illicit
alcohol sales, which can result in public health and social welfare problems. Large publicly held retailers
selling alcohol have one goal: sell as much alcoholic
beverages as possible to the consuming public to drive
profits. Individual states are in the best position to tailor the regulations to local conditions and norms. A decision that further restricts the state’s ability to
regulate alcohol within its borders could potentially result in more harm than good as it would weaken consumer protection efforts. As noted by this Court, state
alcohol laws are supported by “a strong presumption of
validity and should not be set aside lightly.” North Dakota, 495 U.S. at 433; Capital Cities Cable Inc. v. Crisp,
467 U.S. 691, 714 (1984) (emphasis added).
------------------------------------------------------------------
27
CONCLUSION
Consumer Action urges the Court to be mindful of
the effects its decision in this case will have on the ability of states to regulate and enforce their alcohol laws
that are designed to promote competition, strengthen
consumer protection enforcement, and protect the
health and safety of consumers. Further, Consumer Action urges the Court to strongly consider the negative
consequences an affirmance will have on the price, variety, quality, and choice of alcohol in Tennessee and
throughout the country.
Respectfully submitted,
DAVID BALTO
Attorney at Law
1325 G Street, NW
Suite 500
Washington, DC 20005
202-577-5424
david.balto@dcantitrustlaw.com
Attorney for Amicus Curiae Consumer Action
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.