Amicus Curiae Brief — Tenn. Wine & Spirits Retailers Ass'n v. Byrd, 139 S. Ct. 52 (2018) (No. 18-96)

No. 18-96

Petitioner,

CLAYTON BYRD, AFFLEURE INVESTMENTS, INC.,

AND TENNESSEE FINE WINES AND SPIRITS, LLC,

Respondents.

,*

On Writ Of Certiorari To The

United States Court Of

For The Sixth Circuit

*»

A

BRIEF OF AMICUS CURIAE CONSUMER ACTION

IN SUPPORT OF PETITIONER

>

Attorney for Amicus Curiae Consumer Action

COCKLE LEGAL BRIEFS (800) 226-6964

WWW COCKLELEGALBRIEFS. COM

i

TABLE OF CONTENTS

Page

TABLE OF AUTHORITIES .......................00c000000e il

INTERESTS OF AMICUS CURIAE.................... 1

SUMMARY OF ARGUMENT .............................. 3

EE seininrsidsntinntinesaninaicaigiticnonmmmmmninegsenapes 5

I. THREE-TIER DISTRIBUTION SYSTEM

PROMOTES COMPETITION AND BENE-

FITS CONSUMERS ..................:0ccceeeeeeeeeeees 5

A. Background of Three-Tier Distribution

B. Consumer Choice Explodes With Three-

Tier Distribution System ...................... 8

C. The Sixth Circuit’s Decision Undermines

the Three-Tier Distribution System and

Threatens To Reduce Competition and

Consumer Choice.......................000000000000 17

Il. PRESERVING THE THREE-TIER DISTRI-

BUTION SYSTEM SERVES IMPORTANT

POLICY GOALS INCLUDING STRONG

CONSUMER PROTECTION ENFORCE-

ss

TABLE OF AUTHORITIES

Page

CASES

Brown Shoe Co. v. United States, 370 U.S. 294

ci ha i aie a id a 20

Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429

eT IT scictictectehnilniniptsintistaisaiclidheatsinithcinincitpitaenenes 20

Cal. Retail Liquor Dealers Ass’n v. Midcal Alu-

minum, Inc., 445 U.S. 97 (1980) ...............cceceeeeeeeeneens 6

Capital Cities Cable Inc. v. Crisp, 467 U.S. 691

ictal i ate rie inaiilinsiaiaae 26

Granholm v. Heald, 544 U.S. 460 (2005)............ passim

North Dakota v. United States, 495 U.S. 423

IST ceivnlinsicinestpeiesiapiatetianehdncieelapelaitiniesdaiapchlihitahiaciaaediaes passim

United States v. Frankfort Distilleries, 324 U.S

IESE ee IEE ee on 20

Ziffrin, Inc. v. Reeves, 308 U.S. 132 (1939) ................. 20

CONSTITUTIONAL PROVISIONS

Se Ss CN IID sestesanccascasscncscessnsenscescnsens passim

Se es I, Sc oe nrnnennignenenmenbeniieeete 7

TABLE OF AUTHORITIES — Continued

OTHER AUTHORITIES

AEI website, available at http-//www.aei.org/

publication/charts-of-the-day-welcome-to-the-

golden-age-of-american-craft-beer/ .................. 10, 11

Alcohol Policy Information System website, avail-

able at https://alcoholpolicy.niaaa.nih.gov/............. 23

American Craft Beer website, available at

https//www.americancraftbeer.com/the-golden-

age-of-american-craft-beer/.......................ce-css000+e--+- 10

Andre Barlow, One Drink Too Many: Why Con-

sumers Will Lose from the Latest Beer Merger,

Law 360 (Nov. 12, 2015) ............cccccccccccceeeseseeeeeeeeeeeees 8

Andre Barlow, Right Distribution Is Key to Suc-

cessful Beer Remedies, Law 360 (Jan. 27, 2016) ......... 6

Andrew Adams, Costco Wine Buyer Talks Shelf

Strategy, Wines & Vines, February 16, 2017,

avaiiable at https://www.winesandvines.com/

a nicincicntinctanenpiddgntiininapiaiatndmeneipeemenanese 18

Anna King, States Consider Banning Alcoholic

Energy Drinks, NPR (Nov. 9, 2010) ........................ 22

Barry Lynn, Big Beer, A Moral Market, and In-

novation, Harv. Bus. Rev. (2012) ..................ccccccecceee 6

Bryan Pearson, Walmart Inventory Cuts, Forbes,

November 9, 2015, available at https://www.

forbes.com/sites/bryanpearson/20 15/1 1/09/

walmart-inventory-cuts-5-ways-to-make-room-

for-the-best-shoppers/#5 1155b59378c.................... 18

iv

TABLE OF AUTHORITIES — Continued

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................

Center for Alcohol Policy, National Survey Finds

Americans Overwhelmingly Support the Cur-

rent System of Alcohol Laws and Regulation

(2015), available at http:/Awww.centerforalcoho!l

policy.org/2015/08/18/national-survey-finds-

americans-very-satisfiedwith-current-alcohol-

laws-and-regulations-3/ (last visited Sept. 16,

FIDE ciccecensenecssseupsechenenssusqatsntesqnessensssieionmessceqvee

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-

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,

Danae King, Laws including high-proof grain

alcohol ban take effect Tuesday, Baltimore

Sun, June 30, 2014, available at https://Awww.

baltimoresun.com/news/maryland/bs-md-grain-

alcohol-illegal-tuesday-20140630-story.htm! ....

Page

7

TABLE OF AUTHORITIES — Continued

Ed Marcum, USA Today, Tennessee grocery stores

say wine sales a success, March 17, 2017 ...........

Ensuring Competition Remains on Tap: The AB

InRev/SABMiller Merger and the State of

Competition in the Beer Industry: Hearing Be-

fore the Subcomm. on Antitrust, Competition

Policy and Consumer Rights of the S. Comm.

on the Judiciary, 114th Cong. (2015). (state-

ment of Craig Purer, National Beer Wholesal-

ers Association), available at https://www.

FTC Releases Fourth Major Study on Alcohol

Advertising and Industry Efforts to Reduce

Marketing to Underage Audiences, available

at

2014/03/ftc-releases-fourth-major-study-alcohol-

advertising-industry......................c.cccceceeeeeeeeeeees

Johns Hopkins Bloomberg School of Public

Health Press Release, Governor Signs Bill

Banning Extreme-Strengih Alcohol in Mary-

land, May 5, 2014, available at https://www.

newswise.com/articles/view/617429/?sc=dwhr

Justice Department Requires Anheuser-Busch

InBev to Divest Stake in MillerCoors and Alter

Beer Distributor Practices as Part of SABMil-

ler Acquisition, Department of Justice Press

Release, July 20, 2016 ..................ccccccececeeeeeeeeeees

— 19

vi

TABLE OF AUTHORITIES — Continued

Kara Newman, Craft Distilleries Growth Con-

tinues, Wine Magazine, September 27, 2018.....

Karen McVeigh, Toxic and untaxed: perils of

global trade in bootleg liquor exposed, Guard-

ian, June 11, 2018, available at https://www.

theguardian.com/globaldevelopment/2018/un/

11/bootleg-liquor-africa-latin-america...............

KPMG, An Analysis of the Structure and Admin-

istration of State and Local Taxes on the Dis-

tribution and Sale of Beer, NBWA (2009) and

update in 2014, available at https//www.nbwa.

Oo -tax-study-state-and-local-

taxes-distribution-and-sale-beer-0 ....................

Lee Murphy, Walgreens Beverage Alcohol Pow-

erhouse, Shaken News Daily, August 22, 2017,

Mack Burke, Four states watching Oklahoma

closely as lawmakers push liquor law over-

haul, Norman Transcript, October 9, 2015,

available at https://Awww.normantranscript.com/

news/four-states-watching-oklahoma-closely-

as- i icle d4058ece-

National Institute on Alcohol Abuse and Alco-

holism, available at https://Awww.niaaa.nih.gov/

alcohol-health/overview-alcohol-consumption/

alcohol-facts-and-statistics .................c0cccceeeeeeeee

lawmakers-push-liquor-law/article |

6c48-11e5-abd7-67860a35ccb7. htm! .................

vii

TABLE OF AUTHORITIES — Continued

Neil Houghton and Marin Gjaja, For Small and

Large Brewers, the U.S. Market Is Open, Bos-

ton Consulting Group, June 19, 2014, availa-

ble at https://Awww.bcg.com/publications/2014/

consumer-products-for-small-large-brewers-us-

Number of Breweries, BREWERS ASSOCIATION.ORG,

https://www.brewersassociation.org/statistics/

eriiencntiniantitenntinscentesinasesccnnese 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.......................0000ccccceeceeee 8

Presidential Proclamation 2065 of December 5,

1933, available at https://catalog.archives.gov/

id/299967/3/public?contribution Type=tag............ 6,7

Raymond B. Fosdick & Aibert L. Scott, Toward

I ants icenetccineaisthipmendengenmedpnibaninbiasbecetenacee 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 Mar-

ket, Euromonitor, November 6, 2018, available

at https://www.securingindustry.com/food-and-

beverage/a-quarter-of-alcohol-is-illicit-in-

emerging-markets-report/s 104/a8779/#.W-YHH

TABLE OF AUTHORITIES — Continued

The Alcohol Tobacco Trade and Tax Annual Re-

port, Fiscal Year 2017, available at https-//www.

ttb.gov/foia/pdf/ttbar2017 pdf .............ccccccccceeeeeeeeeeees 9

1

INTEREST OF AMICUS CURIAE

Consumer Action has been a champion of un-

derrepresented consumers nationwide for forty-seven

years.' As a national non-profit 501(c)\(3) organization,

Consumer Action focuses on consumer education that

empowers low-and moderate-income and limited-

English-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 compre-

hensive website (www.consumer-action.org) and an-

nual surveys of financial and consumer services. Over

7,000 community and grassroots organizations benefit

annually from its extensive outreach programs, train-

ing materials and support.

The organization achieves its mission through

several channels, from direct consumer education to

' Pursuant to Rule 37.6, Consumer Action states that all par-

ties 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 ite 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 pub-

lic interest, Consumer Action submits this brief to pro-

vide its perspective on the potential impact of this

Court’s decision regarding Tennessee’s durational res-

idency 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 constitu-

tional 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 enhanc-

ing competition. Many states have durational resi-

dency 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, pro-

hibiting 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 pro-

tects competition, resulting in increased innovation

and greater variety of choice.

Importantly, the Sixth Circuit decision that dura-

tional residency requirements violate the dormant

Commerce Clause undermines the three-tier distribu-

tion 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 in-

dustry in individual states potentially allowing domi-

nant corporations to exert greater influence over the

retail sector throughout the United States. If the deci-

sion 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 con-

siderable concern to consumers. As a result, customers

have a special interest that is not already directly rep-

resented by the parties to this litigation, and why we

respectfully request this Court to consider this pro-

posed Amicus brief and the implications for consumers.

,*

-

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 com-

petition, protect consumer choice and foster consumer

protection. Tennessee, like many states, has a “three-

tier” distribution system for alcohol that separately

regulates (1) producers of beer, wine and liquor, (2)

wholesalers, and (3) retailers that sell directly to con-

sumers. Under Tennessee law, there is a two-year

4

residency requirement for the initial license of a re-

tailer that is now being scrutinized by this Court.

Amicus fully supports Petitioner’s arguments on

why Tennessee’s two-year durational residency re-

quirement for the initial license of a retailer is consti-

tutional. Amicus writes separately to highlight how

the Sixth Circuit’s decision will harm small businesses

and consumers. Tennessee’s right to license and regu-

late 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 com-

plete authority and right to regulate a three-tier

distribution system within its borders because it un-

doubtedly has benefitted competition and consumers

across the country. The Sixth Circuit’s decision con-

flicts 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 dam-

age 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 promot'ng 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 pro-

tecting 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 dis-

rupt the competitive landscape, damage the structure

of the alcohol distribution markets, weaken states’

consumer protection ep” -~rcement capabilities, and re-

duce consumer confidence as health and safety risks

increase. Third, Amicus fully supports Petitioner’s ar-

guments and reasoning that Tennessee’s two-year du-

rational-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 in-

state 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 distribu-

tion system, which allows states to make decisions on

who may sell alcohol to its in-state consumers.

&

aA

ARGUMENT

I. THREE-TIER DISTRIBUTION SYSTEM

PROMOTES COMPETITION AND BENE-

FITS CONSUMERS

A. Background of Three-Tier Distribution

System

The U.S. alcoholic beverage industry is complex

and highly regulated. Under the Twenty-first Amend-

ment, the states have plenary authority to regulate the

6

sale and distribution of alcohol within their borders,

including regulation of vertical relationships of alcoho!

companies through a three-tier distribution system of

licensed and structurally separate producers, distribu-

tors, and retailers. Granholm v. Heald, 544 U.S. 460,

466, 473 (2005); North Dakota v. United States, 495

US. 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.? 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 mar-

ket.’ 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 re-

sulted in producers of alcohol having control over re-

tailers to favor their own brands and to engage in illicit

behavior.‘

? 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).

* Barlow, supra note 2; Lynn, supra note 2.

* 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 na-

tion 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 pre-

vent 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 vertically-

integrated system has “all the vices of absentee owner-

ship. The manufacturer knew nothing and cared

nothing about the community. All he wanted was in-

creased sales. He saw none of the abuses, and as a

non-resident he was beyond local influence.” Many of

the states created three-tier distribution systems

where producers including brewers, wineries, and dis-

tillers 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?contribution Type=

tag.

° 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 con-

sumers.® The result is a three-tier system, which re-

stricts 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 Three-

Tier Distribution System

As a result of the three-tier system, consumer

choice has exploded. It was put in place to prevent pro-

ducers 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.”’ Alcohol regula-

tion, unlike other industry regulations, actually in-

creases diversity of product on retail store shelves and

in restaurants, bars, and liquor stores. Independent

®° Andre Barlow, One Drink Too Many: Why Consumers Will

Lose from the Latest Beer Merger, Law 360 (Nov. 12, 2015).

" Pamela S. Erikson, Safe and Sound at 2 (Campaign for a

Healthy Alcohol Marketplace), available at http//www.nabca.

org/asseta/Doca/Research/Studies/SafeandSound. pdf.

9

distributors and retailers sell beer, wine, and spirits

driven by consumer demand when they are not be-

holden to powerful alcohol producers. As a result, re-

tailers 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 in-

terest, distributors and retailers are free to take on ad-

ditional brands, which has created a market for and

spurred the growth of small craft brewers, wineries,

and craft distillers. Indeed, the alcohol beverage mar-

ket 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 estab-

lished 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 cur-

rent alcohol beverage marketplace.* Besides the evi-

dence 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

* The Alcohol Tobacco Trade and Tax Annual Report, Fiscal

Year 2017, available at https//www.ttb.gov/foia/pdfttbar2017 pdf.

10

beverages in their communities, and 84 percent agreed

that there are more local and imported beers and liq-

uors available than ever before.’

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.”° 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."

° 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/20 15/08/18/national-survey-finds-

americans-very-satisfiedwith-current-alcohol-laws-and-regulations-

3/ (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%.

© Justice Department Requires Anheuser-Busch InBev to Di-

vest Stake in MillerCoors and Alter Beer Distributor Practices as

Part of SABMiller Acquisition, Department of Justice Press Re-

lease, July 20, 2016.

"! See American Craft Beer website, available at https//www.

americancraftbeer.com/the-golden-age-of-american-craft-beer/; AEFI

1]

The three-tier distribution system, in particular,

has become the safety valve that keeps beer markets

competitive as the United States Department of Jus-

tice’s Antitrust Division (“DOJ”) demonstrated in its

challenge to Anheuser-Busch InBev’s (“ABI”) acquisi-

tion of SABMiller. In that action, the DOJ made clear

that “l[elffective distribution is important for a brewer

to be competitive in the beer industry.”’* 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.” 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 independ-

ent distributors and retailers, led to an increase in in-

novation and consumer choice as new beers with a

wide range of unique styles and tastes were being in-

troduced to consumers every day.

The DOJ, however, recognized that small brewer-

ies cannot grow in scale and effectively compete with-

out access to efficient beer distribution networks.

website, available at http//www.aei.org/publication/charts-of-the-

day-welcome-to-the-golden-age-of-american-craft-beer/.

'? United States v. Anheuser-Busch InBev and SABMiller, pic,

Competitive Impact Statement 8 (July 20, 2016).

‘8 United States v. Anheuser-Busch InBev and SABMiller, pic,

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 sub-

mit to oversight for the next eight years, all in an effort

to protect the growth of the craft brew industry in fur-

therance of state regulatory goals.'*

The federal government’s consent order regulat-

ing 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 distri-

bution networks are still relevant to the industry to-

day. 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 alco-

hol policy for the United States. The last one-size-fits-

all federal solution was the 18th Amendment which

imposed National Prohibition. That one-size-fits-all

approach was replaced with a 50-size approach com-

bined with federal laws. This court in Granholm im-

plicitly 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.

“* United States v. Anheuser-Busch InBev and SABMiller, pic,

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 re-

main open to the tremendous variety of breweries (do-

mestic 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 flour-

ish, 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 en-

hanced as the states have reduced the economic incen-

tives 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 pro-

moted competition spurring the growth of small

businesses. Indeed, today’s craft beer, winery, and dis-

tillery renaissance in the United States was made pos-

sible 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.” Since

1995, the number of U.S. wineries has grown more

than five-fold, from approximately 1,800 to 9,200.'°

And the craft distillery industry is also experiencing

incredible growth as the number of active craft distill-

ers grew from 200 local distilleries in 2005 to 1,835 as

of August 2018."

A Boston Group Consulting (“BGC”) study demon-

strates 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."* The BGC study explains that

small craft brewers were able to enter and grow

‘© 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-growth-

slows-5-percent; Number of Breweries, BREWERS ASSOCIATION.ORG,

available at https//www.brewersassociation.orp/statistica/number-

of-breweries/.

“® Cody Jennings, Predictions for Wine Industry M&A in 2018

Success of the premium . ine segment should drive much of the

activity WINES AND VINES, available at https://Awww.winesandvines.

com/features/article/19382 1/Predictions-for-Wine-Industry-M-and-

A-in-2018, January 2018.

"’ 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 (TWSR) and advisory

services consultancy Park Street. Lisa Rabasca Roepe, Sage, Craft

Distillers, August 27, 2018.

“ 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/201 4/

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 lim-

ited geographic area. Independent distributors make

warehousing and trucking more efficient by aggregat-

ing all the various brands. The BGC study compared

the brewing industry to direct store delivery (“DSD”)

categories and cetermined that state regulation made

the brewing industry more competitive than the un-

regulated markets where large DSDs have a signifi-

cant competitive advantage in DSD categories such as

ice cream, soda, and snacks."” The BGC study notes

that the three-tier distribution protections prevent the

two powerful breweries from using their scale to ex-

tract advantages from the distribution system the way

that powerful DSD suppliers dominate in other prod-

uct categories.” 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.”

19 Id.

® Id.

*! See Ensuring Competition Remains on Tap: The AB In-

Bev/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.

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 con-

sumers have been harmed by its durational residency

requirements. On the contrary, the facts suggest that

Tennessee has a strong alcohol beverage retail indus-

try.” According to a press report in 2016, the number

of new liquors-by-the-drink licenses has gone up every

year since 2009.” In Tennessee, “|t]here are more dis-

tilleries every year, more local wineries, more brewer-

ies and more breweries making high-gravity beer.

There are more wholesaiers too, which means more

products in more places.” In short, Tennessee’s alco-

holic beverage market appears to be competitive in-

deed. 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 al-

coholic beverage markets are healthier than unregu-

lated markets, which are characterized by large

dominant players without any substantial growth of

small businesses.

™ 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 opti-

mistic about the future of alcohol in the state, Nashville Scene,

June 30, 2016.

* Carie Gervin, Tennesseans are optimistic about the future

of alcohol in the state.

* 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 al-

coholic beverage distribution system within the state

and, specifically, to create a three-tier distribution sys-

tem that balances a number of public policy goals in-

cluding the prevention of large firms from dominating

local markets through vertical integration and promo-

tion 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).” Although there are

*® Mack Burke, Four states watching Oklahoma closely as law-

makers 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 regula-

tions allow all three to be sold in the same location.”

Walgreens has a very targeted approach as it only

stocks 150 SKUs for wine, 50 for spirits, and 35 for

beer.”’ In other words, markets dominated by large cor-

porations 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 re-

frigerator 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 ex-

penditures for point of sale marketing in retail estab-

lishments so that their brands will be promoted in the

2015, available at https:/Awww.normantranscript.com/news/four-

states-watching-oklahoma-closely-as-lawmakers-push-liquor-law/

article d4058ece-6018- 1 1e5-abd’7-67860a35ccb7 html; Bryan Pearson,

Walmart Inventory Cuts, Forbes, November 9, 2015, available at

https://www.forbes.com/sites/bryanpearson/201 5/1 1/09/walmart-

inventory-cuts-5-ways-to-make-room-for-the-best-shoppers/#51 1

55b5937 8c.

7° Andrew Adams, Costco Wine Buyer Talks Shelf Strategy,

Wines & Vines, February 16, 2017, available at https://www.wines

andvines.com/neww/article/180732/Costco- Wine- Buyer-Talks-Shelf-

Strategy.

*" 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-

beverage-alcohol-powerhouse/.

19

store.” Accordingly, smaller producers have difficulty

getting large retailers to display their products and as

the three-tier system is weakened so will the protec-

tions 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 Tennes-

see, 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 dis-

tributors, retailers, and consumers. The astonishing

growth at the producer level suggests that competition

has increased and that consumers have been the ben-

eficiaries of that competition in the form of innovative

products at relatively lower prices.

Moreover, the record is devoid of any facts to sup-

port any claim that there is some form of consumer

harm present in Tennessee. The only claim from Re-

spondents is that an out-of-state retailer may be ex-

cluded 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 pol-

icy 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

* FTC Releases Fourth Major Study on Alcohol Advertising

and Industry Efforts to Reduce Marketing to Underage Audi-

ences, available at https://www.ftc.gov/news-events/press-releases

2014/03/ftc-releases-fourth-major-study-alcohol-advertising-

industry.

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 com-

petitors. Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc.,

429 US. 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.

ll. PRESERVING THE THREE-TIER DISTRI-

BUTION SYSTEM SERVES IMPORTANT

POLICY GOALS INCLUDING STRONG CON-

SUMER 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 sanc-

tions the state the right to prohibit the production, dis-

tribution, 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 compre-

hensive rules and regulations that resulted in 50

21

different regulatory fram eworks and markets for alco-

holic beverage companies. The goal of state alcohol reg-

ulation is to protect the welfare, health, peace, morals

and safety of the public by “promoting temperance,

ensuring orderly market conditions, and raising reve-

nue.” 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.” Second, it

promotes small entrepreneurial businesses. For smal!

producers (craft brewers, small wineries, and craft dis-

tilleries), they are given equal access to the market-

place 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

*° KPMG, An Analysis of the Structure and Administration of

State and Local Taxes on the Distribution and Sale of Beer, NBWA

(2009) anu update in 2014, available at https//www.nbwa_.orp/

resources/kpmg-tax-study-state-and-local-taxes-distribution-and-

sale-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 thet has resulted in procompeti-

tive 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 pro-

vide and sell alcoholic beverages. It makes producers,

wholesalers, and retailers accountable to local commu-

nities. Second, the system fosters controlled and ac-

countable 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 nu-

merous 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 alco-

holic energy drinks prior to any intervention by the

federal government.”

* Anna King, States Consider Banning Alcoholic Energy

Drinks, NPR (Nov. 9, 2010); Johns Hopkins Bloomberg School of

Extreme-Strength Alcohol in Maryland, May 5, 2014, available at

https//www _.newswise.com/articles/view/617429/?9sc=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 consum-

ers from deceptive and fraudulent conduct, so it be-

lieves 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 in-

dustry in the United States is relatively safe. The

three-tier system prohibits the sale of contaminated al-

cohol and ensures that producers, wholesalers, and re-

tailers 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” indicat-

ing that 25 percent of the alcohol sold around the world

is illicit.*' 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-grain-

alcohol-illegal-tuesday-20140630-story. html; Alcohol Policy Infor

mation System website available at https://alcoholpolicy.niaaa.

nih.gov/.

™! Size and Shape of the Global Illicit Alcohol Market, Eu-

romonitor, November 6, 2018, available at https//www.securing

industry.com/food-and-beverage/a-quarter-of-alcohol-is-illicit-in-

emerging-markets-report/s 104/a8779/#.W-YHHpNKhaQ.

24

drinks are illicit.** Furthermore, the Euromonitor Re-

port concluded that there are five main factors driving

the illicit trade in alcohol, including low awareness of

the risks, low prices driving demand, inadequate regu-

lation that can encourage the illicit market, a lack of

enforcement, and poorly-regulated distribution chan-

nels. Fortunately, in the United States, there is strong

state regulation of the wholesale and retail tiers and

interlocking state laws that prevent monopolies in al-

cohol sales and minimize the risks of counterfeit,

tainted, bootleg, or illegal alcohol being sold in our local

communities.*

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 con-

trol over whether to permit importation or sale of liq-

uor and how to structure the liquor distribution

system. A State which chooses to ban the sale and con-

sumption of alcohol altogether could bar its importa-

tion; and, as our history shows, it would have to do so

to make its laws effective. States may also assume di-

rect control of liquor distribution through state-run

* Karen McVeigh, Toxic and untaxed: perils of global trade

in bootleg liquor exposed, Guardian, June 11, 2018, available at

https://www.theguardian.com/globaldevelopment/20 1 8/jun/1 1/

bootles-li frica-lati 2

® 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.

25

outlets.” Granholm, 544 U.S. at 488-89. If a state can

decide to ban sales and assume direct control and op-

erate its own state-run outlets, it surely has the au-

thority to determine what firms will have the privilege

of selling alcohol to its citizens. This Court further ex-

plained: “[T)he aim of the Twenty-first Amendment

was to allow States to maintain an effective and uni-

form system for controlling liquor by regulating its

transportation, importation, and use.” Granholm, at

484-85 (emphasis added).

While America’s state-based, three-tier distribu-

tion system provides consumers with some accounta-

bility, certainty, and reliability regarding the sale of

alcoholic beverages, the Sixth Circuit’s decision invali-

dating 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 alco-

hol consumption. Because of alcohol’s well-known ex-

ternalities, the state knows that the greatest output of

alcohol is not the optimal goal of regulation.”

*“ National Institute on Alcohol Abuse and Alcoholism, avail-

able at https//www-niaaa.nih gow/alcohol-health/overview-alcohol-

consum ption/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 alco-

hol 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 dif-

ferent from other commodities. The sale of alcohol

must be regulated to reduce the chances of abusive ex-

cessive consumption, underaged drinking, and illicit

alcohol sales, which can result in public health and so-

cial 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 tai-

lor the regulations to local conditions and norms. A de-

cision that further restricts the state’s ability to

regulate alcohol within its borders could potentially re-

sult in more harm than good as it would weaken con-

sumer 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 Da-

kota, 495 U.S. at 433; Capital Cities Cable Inc. v. Crisp,

467 U.S. 691, 714 (1984) (emphasis added).

,

A

27

CONCLUSION

Consumer Action urges the Court to be mindful of

the effects its decision in this case will have on the abil-

ity 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 Ac-

tion urges the Court to strongly consider the negative

consequences an affirmance will have on the price, va-

riety, quality, and choice of alcohol in Tennessee and

throughout the country.

Respectfully submitted,

Davip 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