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

No. 18-96

IN THE

Supreme Court of the United States

TENNESSEE WINE AND SPIRITS

RETAILERS ASSOCIATION,

Petitioner,

v.

CLAYTON BYRD, ET AL.,

Respondents.

On Writ Of Certiorari

To The United States Court Of Appeals

For The Sixth Circuit

BRIEF OF WINE AND SPIRITS WHOLESALERS OF

AMERICA, INC. AS AMICUS CURIAE IN SUPPORT

OF PETITIONER

MIGUEL A. ESTRADA

JO MOAK Counsel of Record

General Counsel Lucas C. TOWNSEND

JACOB HEGEMAN NATHAN H. JACK

WINE & SPIRITS WHOLESALERS GIBSON, DUNN & CrautcHer LLP

OF AMERICA, INC. 1050 Connecticut Avenue, NW

805 15th Street, NW, Ste. 1120 Washington, DC 20036

Washington, DC 20005 (202) 955-8500

mestrada@gibsondunn.com

ROBERT E. DUNN

GIBSON, DUNN & CrautTcHuEer LLP

1881 Page Mill Road

Palo Alto, CA 94304

Counsel for Amicus Curiae

TABLE OF CONTENTS

Page

TABLE OF AUTHORITIES. ..............000.0000...20000.2 ii

INTEREST OF AMICUS CURIAE AND

SUMMARY OF ARGUMENT .....00 ee. 1

EE ee 8

I. Section 2 Was Intended To

Immunize State é ation Of In-

Aginat Dormant Commerce Clause

ll. This Court’s Precedents Confirm

That States Retain Broad Authority

To Structure Their Three-Tier

III. Durational-Resi

i ts Are Within The

Power Reserved To The States By

Ee 24

NY eitbnincdnectncesserecesmnestensevevesvestenseucesess 34

TABLE OF AUTHORITIES

Page(s)

Cases

324 Liquor Corp. v. Duffy,

LC ee 18

44 Liquormart, Inc. v. Rhode Island,

EE Ee eae 17

Arnold's Wines, Inc. v. Boyle,

571 F.3d 185 (2d Cir. 2009) ................... 2, 7, 25, 29

Bacchus Imports, Ltd. v. Dias,

a Ee 6, 20, 21

BMW of North America, Inc. v. Gore,

i Ree 19

Bowman v. Chi. & Nw. Ry. Co.,

En 9

Brooks v. Vassar,

462 F.3d 341 (4th Cir. 2006)... en... 29

Brown-Forman Distillers Corp. v. New

York State Liquor Authority,

EES

Cal. Retail Liquor Dealers Ass’n v.

Midcal Aluminum, Inc.,

OU 9, 17, 18, 24

Capital Cities Cable, Inc. v. Crisp,

Te 4, 5, 16

Carter v. Virginia,

icici daildicaenientnninbereinemiienin 15

Collins v. Yosemite Park & Curry Co.,

304 U.S. 518 (1938)....................---. "a eee 17

Cooper v. Tex. Alcoholic Beverage

Comm’n,

820 F.3d 730 (5th Cir. 2016).........-.........0--0ne 32

Costco Wholesale Corp. v. Maleng,

522 F.3d 874 (9th Cir. 2008)................... a 25

Craig v. Boren,

429 U.S. 190 (1976).............--c0000---nc-0 4, 9, 13, 16

Dep't of Rev. v. James Beam Co.,

Be a cerecscntncenisctinnnerenccsmnntmanttientii a 16

Dickerson v. Bailey,

336 F.3d 388 (6th Cir. 2003)...................-.....--.--.. 25

Granholm vy. Heald,

544 U.S. 460 (2005).....5, 6, 8, 9, 11, 12, 13, 15, 21,

22, 23, 24, 27, 29, 32

Healy v. The Beer Institute,

ae 19

Hostetter v. Idlewild Bon Voyage Liquor

Corp.,

og 14, 17, 18

iv

Ind. Brewing Co. v. Liquor Control

Comm'n,

; 8S OT) | een 14

James Clark Distilling Co. v. Western

Maryland Railway Co.,

BEB UB. BU1 (1B17) ...0ccccccceeceeeceecssccrececeserseescesesess 11

Joseph S. Finch & Co. v. McKittrick,

SOB U.S. SOG (1BBD) .......-..2...2002200000ceeeecereessessessores 14

Larkin v. Grendel’s Den, Inc.,

450 U.S. 116 (19GB).........200022.02200000esseeeeerereessensorses 16

Lebamoff Enter. v. Snyder,

No. 17-10191, 2018 WL 4679612

(E.D. Mich. Sept. 28, 2018) ...........---.-----cecseeenees 33

Leisy v. Hardin,

. ois Bl) 9

License Cases,

46 US. (5 How.) 504 (1847) ...........------------ceceenenenes 9

Mahoney v. Joseph Triner Corp.,

BE, Co cncccsccverevaceceresrocesnnssoosoasee 13, 14

McDonald v. Chicago,

6 8), 15

North Dakota v. United States,

495 U.S. 423)(1990)................... wees 6, 8, 17, 24, 29

Rhodes v. lowa,

170 U.S. 412 (1898).............-.--------+

Scott v. Donald,

TN ae 10

South Dakota v. Wayfair, Inc.,

i csmemnnis 31

Southern Wine & Spirits of Am. Inc. v.

Div. of Alcohol and Tobacco Control,

731 F.3d 799 (8th Cir. 2013).......000...... 3, 27, 28, 30

State Bd. of Equalization of Cal. v.

Young’s Mkt. Co.,

SETS Se ne See 5, 13, 16

United States v. Frankfort Distilleries,

EERE 12

United States v. Mississippi Tax

Comm'n,

NN I ae 17

United States v. Mississippi Tax

Comm'n,

EST er AS 17

Vance v. W.A. Vandercook Co.,

ee 10

Wisconsin v. Constantineau,

AE 16

Ziffrin, Inc. vy. Reeves,

ESE aa 5, 14

Statutes

Act of Aug. 8, 1890, ch. 728, 26 Stat. 313

(codified at 27 U.S.C. § 121) (“Wilson Act”) ........ 10

Act of Mar. 1, 1913, ch. 90 §1, 37 Stat.

699 (codified at 27 U.S.C. § 122)

(“Webb-Kenyon Act”) ............... 5, 10, 11, 12, 13, 22

Ark. Code Ann. § 3-4-606(a)-(b) ........-..-2.cc-ccceeeceeeeees 29

Ind. Code Ann. § 7.1-1-1-1...........2cccccecceccceeeeeeeeeeeennnes 28

Ind. Code Ann. § 7.1-3-21-3.............cccccccceeeeeeeeeeeneenene 29

Ky. Rev. Stat. Ann. § 243. 10001 )(D) ...........---.2-ecceeeees 29

La. Stat. Ann. § 26:80(A)(2) ............2.:cccceeeeeeneeeneneee. 29

Md. Code Ann., Alcoholic Beverages, §3-102 ......... .29

Me. Rev. Stat. tit. 28-A, § 1401(5) ............--.-.ccceeee 23

Blo, Bw. Bhat § BELG occcccccccccscccscccccsscsccoccoscosanees 28

Mo. Rev. Stat § 311.060.2(3)-3 ...00.. 00. .ccccccccceceeeeenes 29

N.C. Gen. Stat. Ann. § 18B-900(a)(2) ..........-.......... 29

Okla. Stat. Ann. tit. 37A, § 2-146(A)(1).................... 29

S.C. Code Ann. § 61-6-1 1002) ..............2ccccccceneeeeeenenene 29

Tenn. Code Ann. § 57-3-203(b)\(1) ............. inet 3, 8, 29

Tenn. Code Ann. § 57-3-203(f)(1 MA) ..............2......cee0ee 3

Tenn. Code Ann. § 57-3-204(b).................... 3, 8, 27, 28

Wis. Stat. Ann. § 125.04(5)(a)2 ......0.0.ccccccccecceeeeeeneee 29

es Gn AI Be resnnccnsccentinesiibnensncognesnsnnesceees 28

Rules

ee i itcrscncnsincscinstnterntnnetvestnccinns 1

Supreme Court Maske 37.6..........c0ccrccccrccoccescosncssscessoosess 1

Regulations

Ariz. Admin. Code § R19-1-201(A)(1(b)................... 29

Constitutional Provisions

U.S. CONST. amend. XXI, § 2 ............:0:ccccccceeeeeeees 4,12

Other Authorities

76 Cong. Rec. 4,143 (Feb. 15, 1933)

(statement of Sen. Blaine) .....................0..00.000000 12

76 Cong. Rec. 4,145 (Statement of Sen. Wagner) .... 12

Roni A. Elias, Three Cheers for Three

Tiers: Why the Three-Tiers System

Maintains Its Legal Validity and

Social Benefits After Granholm,

14 DePaul Bus. & Com. L.R. (2015).............. 26, 28

Daniel Glynn, Granholm’s Ends Do Not

Justify the Means: The Twenty-First

Amendment's Temperance Goals

Trump Free-Market Idealism,

8 J.L. Econ. & Pol’y 113 (2011)... 00. 20

Vill

H.R. Rep. No. 1461, 62d Cong.,

Nn i cemenniniont 11

Joseph E. Kallenbach, /nterstate

Commerce in Intoxicating Liquors

Under the Twenty-First Amendment,

14 Temple L.Q. 474 (1940)........0000000000000.. 14, 15, 23

National Alcohol Beverage Control

Association, Control State Directory

and Info,

https://www.nabca.org/control-state-

directory-and-info

(last visited Nov. 12, 2018) .............0cccccccccccecseeeeee 33

Note, Constitutional Law—Power of

States to Regulate Manufacture and

Sale of Liquor Under Twenty-First

Amendment,

14 NYU L.Q. Rev. 361 (1937) ..00.....0......ccccccccceeeee 12

Note, Economic Localism in States

Alcoholic Beverage Laws-- rience

Under the Twenty-First Amendment,

72 Harv. L. Rev. 1145 (1959)....0000000000000.. 26, 2'/, 29

Note, Legislation, Liquor Control,

38 Colum. L. Rev. 644, 645 (1938)......00000000000000... 10

Christopher G. Sparks, Out-of-State

Wine Retailers Corked,

30 N. Ill. U. L. Rev. 481 (2010)... eee 2, 25

INTEREST OF AMICUS CURIAE

AND

SUMMARY OF ARGUMENT"

Wine & Spirits Wholesalers of America, Inc.

(“WSWA\”) is a national trade organization and the

voice of the wholesale branch of the wine and spirits

industry. Founded in 1943, WSWA represents nearly

400 companies in all 50 states and the District of Co-

lumbia that hold state licenses to act as wine and/or

spirits wholesalers and/or brokers. Wholesalers di-

rectly account for more than 74,000 jobs paying more

than $6.5 billion in wages, and WSWA’s members dis-

tribute more than 80% of all wine and spirits sold at

wholesale in the United States. This case implicates

the interests of WSWA and its members because it

calls into question the validity of long-standing state

laws that regulate the alcohol industry in general, and

alcohol wholesalers in particular. WSWA and its

members have a strong interest in ensuring that

states remain able te determine how best to regulate

the distribution and sale of alcohol within their bor-

ders.

Aicohol is a unique product in American law and

for good reason. The detrimental impacts on individ-

uals, families, and society as a whole that result from

overconsumption and underage consumption of alco-

hol are dramatically different from those related to

' Pursuant to Supreme Court Rule 37.6, counsel for amicus cu-

riae states that no counsel for a party authored this brief in whole

or in part and no one other than the amicus and its counsel made

a monetary contribution to fund the preparation or submissien

of this brief. Pursuant to Supreme Court Rule 37.2, counsel for

amicus curiae states that Petitioner and Respondents have al!

entered blanket consents on the docket to the filing of amicus

curiae briefs.

the use of other products, whether measured by scale,

severity, nature, or remediability.

Since the end of Prohibition, most states have

used a three-tier system to regulate effectively the dis-

tribution and sale of wine, beer, and spirits (collec-

tively “liquor” or “alcohol”). The three-tier system

generally separates (and separately regulates) the

production, distribution, and retail levels. Under this

system, a producer of liquor sells its product to a li-

censed wholesaler, who generally pays applicable

state excise taxes and delivers it to a licensed retailer.

Arnold’s Wines, Inc. v. Boyle, 571 F.3d 185, 187 (2d

Cir. 2009). The retailer then sells the liquor to con-

sumers and, where applicable, collects state and local

sales taxes. [bid. Vertical integration between tiers

is generally prohibited. Christopher G. Sparks, Out-

of-State Wine Retailers Corked, 30 N. Ull. U. L. Rev.

481, 487 (2010).

States have chosen the three-tier system because

it allows them to examine records and collect taxes

more efficiently, creates effective barriers to the sale

of alcohol to minors, and ensures orderly market con-

ditions by preventing monopoly or over saturation of

the market. In addition, separating the tiers and di-

rectly regulating each one allows states to prevent or-

ganized crime from gaining control of alcohol distribu-

tion. See Arnold’s Wines, 571 F.3d at 187. These reg-

ulatory systems balance regulation with competition

and protect citizens from the harms of alcohol misuse.

They have created a transparent and accountable liq-

uor market that is the best in the world for safety,

choice, and innovation.

A common feature of three-tier systems is a re-

quirement that retailers and wholesalers be residents

of the state. This requirement flows from the recogni-

tion that in-state wholesalers and retailers can more

readily be held accountable and are likely to be more

socially responsible because they are exposed to the

negative consequences that sometimes result from al-

cohol consumption. See Southern Wine & Spirits of

Am. Inc. v. Div. of Alcohol and Tobacco Control, 731

F.3d 799, 811 (8th Cir. 2013) (Colloton, J). A substan-

tial number of states further require that retailers

and wholesalers reside in the state for a certain period

of time before being eligible for licenses. For example,

the Tennessee statute at issue here requires retailers

and wholesalers to reside in the state for two years

before applying for a license. See Tenn. Code Ann.

§§ 57-3-203(b)(1), (D(A), 57-3-204(bX 2A), (3)A)-

(B). These requirements are simply an expression of

the same underlying interests that support a resi-

dency requirement in the first place: A state is enti-

tled to define residency for these purposes as a bona

fide period of time required for a would-be wholesaler

or retailer to become integrated into the community

such that it is willing and able to protect the state’s

interests related to liquor distribution. As Judge Sut-

ton put it below, requiring licensees “to reside in one

place for a sustained, two-year period ensures that

they will be knowledgeable about the community’s

needs and committed to its welfare.” Pet. App. 50a.

Nevertheless, Respondents contend, and the Sixth

Circuit agreed, that Tennessee’s durational-residency

requirements violate the Commerce Clause because

they are “facially discriminatory and there is no evi-

dence that Tennessee cannot achieve its goals through

nondiscriminatory means.” Pet. App. 29a. The Sixth

Circuit also concluded that “the Twenty-first Amend-

ment does not immunize Tennessee’s durational-resi-

dency requirements from scrutiny under ihe Com-

merce Clause” because “a three-tier system can still

function without these restrictions.” Pet. App. 27a.

That gets the constitutional analysis exactly back-

wards. As the history of the Twenty-first Amendment

demonstrates, apart from repealing Prohibition, the

whole point of the Amendment was to “create[] an ex-

ception to the normal operation of the Commerce

Clause.” Craig v. Boren, 429 U.S. 190, 206 (1976).

Thus, it has long been understood that the Amend-

ment “reserves to the States power to impose burdens

on interstate commerce in intoxicating liquor that, ab-

sent the Amendment, would clearly be invalid under

the Commerce Clause.” Capital Cities Cable, Inc. v.

Crisp, 467 U.S. 691, 712 (1984). In this setting, a

party who challenges a state liquor regulation as “dis-

criminatory” in violation of the Commerce Clause is,

as a practical matter, advancing a claim the Amend-

ment was expressly designed to extinguish.

I. The Twenty-first Amendment prohibits the

“transportation or importation into any State .. . for

delivery or use therein of intoxicating liquors, in vio-

lation of the laws thereof.” U.S. CONST. amend. XXI,

§ 2. As the Amendment’s history confirms, the broad

language of Section 2 was intended tc provide states

with plenary authority to regulate liquor free from the

constraint of the Commerce Clause.

In the 1880s, the Supreme Court struck down, on

dormant Commerce Clause grounds, state laws ban-

ning or burdening the sale of imported liquor. Con-

gress responded by enacting the Wilson Act, which

was intended to curtail dormant Commerce Clause

challenges to state liquor regulations. However, this

Court largely vitiated the Act by not allowing states

to discriminate against out-of-state liquor or prohibit

shipments from out-of-state sources.

Congress again responded, this time with the

Webb-Kenyon Act, which prohibits “[t/he shipment or

transportation” of liquor into a state in violation of

that state’s laws. 27 U.S.C. § 122. Following the

failed experiment with Prohibition, the Twenty-first

Amendment effectuated a political compromise that

allowed commerce in liquor to resume (Section 1)

while granting states the plenary authority over in-

state distribution and sale of liquor that Congress had

previously conferred in the Webb-Kenyon Act (Section

2).

Interpreting Section 2 in the years following rati-

fication, this Court repeatedly held that “[t/he

Twenty-first Amendment sanctions the right of a

state to legislate concerning intoxicating liquors

brought from without, unfettered by the Commerce

Clause.” Ziffrin, Inc. v. Reeves, 308 U.S. 132, 138

(1939); see also State Bd. of Equalization of Cal. v.

Young’s Mkt. Co., 299 U.S. 59 (1936). The text and

history of Section 2, as well as this Court’s early prec-

edent, confirm that the “aim of the Twenty-first

Amendment was to allow States to maintain an effec-

tive and uniform system for controlling liquor by reg-

ulating its transportation, importation, and use.”

Granholm v. Heald, 544 U.S. 460, 484 (2005).

Il. The Court’s more recent decisions have clari-

fied that Section 2 “primarily created an exception to

the normal operation of the Commerce Clause,” but

did not give states carte blanche to ignore “their obli-

gations under other [constitutional] provisions” when

regulating liquor. Capital Cities Cable, 467 U.S. at

712. For example, the Court has held that Section 2

does not authorize states to enact liquor regulations

in violation of the First Amendment, the Equal Pro-

tection Clause, the Export-Import Clause, or the Due

Process Clause. Nor may a state regulate in areas

“outside of its jurisdiction,” North Dakota v. United

States, 495 U.S. 423, 431 (1990), such as by regulating

alcohol distribution on federal land or enacting laws

that have the practical effect of controlling prices in

other states. Successful challenges to state attempts

to regulate extraterritorially do not, however, suggest

the existence of a freewheeling Commerce Clause “ex-

ception” to the Twenty-first Amendment. Rather,

those are cases in which the Amendment simply does

not apply.

With respect to the originally intended scope of

the Amendment—displacement of all dormant Com-

merce Clause challenges to state liquor regulation—

the Court has recognized only a single, narrow excep-

tion to the broad immunity afforded states by the

Twenty-first Amendment, and then only very re-

cently. In Bacchus Imports, Ltd. v. Dias, 468 U.S. 263

(1984), the Court held that state regulations passed

for “mere economic protectionism” of in-state liquor

products—i.e., where the state concedes that the law

is designed solely to increase consumption of in-state

products—are not shielded from scrutiny under the

Commerce Clause. Id. at 276. And in Granholm, the

Court invalidated state laws that allowed local wine

producers to ship directly to consumers—thereby

avoiding the three-tier system—while requiring out-

of-state wine to go through the three-tier system. 544

U.S. at 485. But this exception is extremely narrow.

It applies only to overt discrimination against out-of-

state products. Granholm emphatically reiterated

that a state has “virtually complete control” over “how

to structure the liquor distribution system.” /d. at

488-89.

Ill. Like many states, Tennessee has chosen to

include durational-residency requirements as core

components of its liquor distribution system. These

requirements, which do not discriminate against out-

of-state liquor products, fall squarely within the zone

of state regulatory authority protected by the Twenty-

first Amendment from scrutiny under the dormant

Commerce Clause.

Residency requirements for wholesalers and re-

tailers have been a common feature of three-tier sys-

tems since the ratification of the Twenty-first Amend-

ment. These requirements advance legitimate

Twenty-first Amendment interests in temperance, tax

collection, and orderly market conditions—which can

include preventing monopoly and combatting orga-

nized crime—by ensuring that market participants

have a meaningful connection to the communities

they serve and that the infrastructure for in-state liq-

uor distribution remains subject to state oversight

and regulation.

Duration requirements directly advance these in-

terests by defining who counts as a bona fide resident

authorized to do business within the context of the

three-tier system. Duration requirements are thus

justified on the same grounds as residency require-

ments—those with established roots in the local com-

munity are more likely to be sensitive to local concerns

and held accountable by the community. Duration re-

quirements also allow the state to better evaluate the

applicant’s qualifications and history. Because resi-

dency and duretion requirements are a staple of many

states’ three-tier systems, a challenge to these re-

quirements amounts to “a frontal attack on the consti-

tutionality of the three-tier system itself.” Arnold’s

Wines, 571 F.3d at 190. That argument must fail be-

cause, as this Court has repeatedly held, the three-tier

system is “unquestionably legitimate” under the

Twenty-first Amendment. Granholm, 544 U.S. at 489

(quoting North Dakota, 495 U.S. at 432).

ARGUMENT

After Prohibition, many states began regulating

the importation, transportation, and distribution of

liquor through the “unquestionably legitimate” three-

tier system, Granholm, 544 U.S. at 489—under which

licensed producers sell only to licensed wholesalers,

and licensed wholesalers sell only to licensed retail-

ers. Like many states, Tennessee’s three-tier system

includes a durational-residency requirement for li-

censed retailers and wholesalers to ensure effective

regulatory oversight and public accountability. Tenn.

Code Ann. §§ 57-3-204(b\(2)A), 57-3-203(b)(1).

No party disputes that these provisions would vi-

olate the dormant Commerce Clause if the regulated

product were books or shoes. But the challenged laws

stand on different footing because they regulate alco-

hol. The text and history of the Twenty-first Amend-

ment, as well as this Court’s unbroken precedent in-

terpreting Section 2, confirm that reasonable dura-

tional-residency requirements are immunized from

invalidation under the dormant Commerce Clause.

The Sixth Circuit’s decision striking down Tennes-

see’s durational-residency requirements on dormant

Commerce Clause grounds should thus be reversed.

L. SECTION 2 WAS INTENDED TO IMMUNIZE

STATE REGULATION OF IN-STATE LiQuOoR Dis-

TRIBUTION AND SALE AGAINST DORMANT

COMMERCE CLAUSE CHALLENGES

The Twenty-first Amendment “grants the States

virtually complete control over whether to permit im-

portation or sale of liquor and how to structure the

liquor distribution system.” Granholm, 544 U.S. at

488 (quoting Cal. Retail Liquor Dealers Ass’n v.

Midcal Aluminum, Inc., 445 U.S. 97, 110 (1980)). To

understand why that is so, it is essential to under-

stand the circumstances that led to the Eighteenth

Amendment’s prohibition of intoxicating liquors and

the political compromise that resulted in the Twenty-

first Amendment’s ratification.

A. “The history of state regulation of alcoholic

beverages dates from long before adoption of the

Eighteenth Amendment.” Craig, 429 U.S. at 205. As

far back as the mid-nineteenth century, this Court

“recognized a broad authority in state governments to

regulate the trade of alcoholic beverages within their

restrictions under the Commerce Clause.” [bid. (cit-

ing License Cases, 46 U.S. (5 How.) 504, 579 (1847)).

However, in a series of cases in the 1880s, this Court

invoked the dormant Commerce Clause to invalidate

state laws banning or burdening the sale of imported

liquor. See Bowman v. Chi. & Nw. Ry. Co., 125 U.S.

465 (1888); Leisy v. Hardin, 135 U.S. 100 (1890).

These cases found the state laws to be “repugnant” to

the Commerce Clause because liquor sold in its “orig-

inal package” was part of interstate commerce, which

states had no power to interfere with in the “absence

of congressional permission.” Leisy, 135 U.S. at 124-

25.

10

Congress responded by enacting the Wilson Act,

which subjected imported liquors to the states’ police

power “upon arrival in [the] State, . . . to the same ex-

tent and in the same manner” as liquor produced in-

state, whether or not the liquor was in its “original

packages.” Act of Aug. 8, 1890, ch. 728, 26 Stat. 313

(codified at 27 U.S.C. § 121). Although the Act at-

tempted to protect state liquor regulations from

dormant Commerce Clause challenges, a trio of cases

in the 1890s rendered the Act ineffectual. See Scott v.

Donald, 165 U.S. 58, 100 (1897) (concluding that the

Wilson Act was “not intended to confer upon any State

the power to discriminate injuriously against |out-of-

state] products” that are “subjects of legitimate com-

merce”); Rhodes v. lowa, 170 U.S. 412, 426 (1898)

(holding that “arrival in [the] State” meant that liquor

could not be regulated until it had reached its “point

of destination”); Vance v. W.A. Vandercook Co., 170

U.S. 438, 451-52 (1898) (holding that the “right to ship

merchandise from one State into another” was “wholly

unaffected by” the Wilson Act). “In consequence,

agents of out-of-state dealers were able to solicit or-

ders from individuals, and have the liquor shipped di-

rectly to them.” Note, Legislation, Liquor Control, 38

Colum. L. Rev. 644, 645 (1938).

To stop this burgeoning mail-order business, Con-

gress enacted (over President Taft’s veto) “lajn act

|djivesting intoxicating liquors of their interstate

character in certain cases,” known as the Webb-Ken-

yon Act. Act of Mar. 1, 1913, ch. 90, § 1, 37 Stat. 699

(codified at 27 U.S.C. § 122). The Webb-Kenyon Act

“prohibit|s|” any “shipment or transportation” of “in-

toxicating liquor” “from one State” “into any State” “in

violation of any law of such State.” Jd. As the House

Report explained, the bill was “intended to withdraw

11

the protecting hand of interstate commerce from in-

toxicating liquors transported into a State or Terri-

tory and intended to be used therein in violation of the

law of such State or Territory.” H.R. Rep. No. 1461,

62d Cong., 3d Sess., 1 (1913).

This Court upheld the Webb-Kenyon Act in James

Clark Distilling Co. v. Western Maryland Railway Co.,

242 U.S. 311 (1917), which recognized that the Act’s

“purpose was to prevent the immunity characteristic

of interstate commerce from being used to permit the

receipt of liquor through such commerce in states con-

trary to their laws.” Id. at 324. The Court explained

that, in light of the Webb-Kenyon Act, there is “no pos-

sible ground for claiming” that a state law is invalid

merely “because the liquor was shipped in interstate

commerce.” Jbid. The Court thus interpreted the

Webb-Kenyon Act as “tlaking] the protection of inter-

state commerce away from all receipt and possession

of liquor prohibited by state law.” Id. at 325.

In short, the Webb-Kenyon Act “was an attempt

to eliminate the regulatory advantage, i.e., its immun-

ity characteristic, afforded imported liquor,” so that

states could regulate the internal distribution and

sale of liquor unfettered by the dormant Commerce

Clause. Granholm, 544 U.S. at 482 (citing Clark Dis-

tilling, 242 U.S. at 324).

B. The national experiment with Prohibition was

widely recognized as a failure, and in 1933 the Eight-

eenth Amendment was repealed by the Twenty-first.

But the states would not have ratified the Amend-

ment had it meant returning to the pre-Webb-Kenyon

regime where states were powerless to regulate the

distribution and sale of liquor that happened to cross

state lines. Indeed, the Amendment was “the result

of a consistent demand from the states to be permitted

12

an unrestricted power to regulate the transportation,

sale, and use of intoxicating liquor within their re-

spective borders.” Note, Constitutional Law—Power

of States to Regulate Manufacture and Sale of Liquor

Under Twenty-First Amendment, 14 NYU L. Q. Rev.

361, 361 (1937). The Twenty-first Amendment thus

“made a fundamental change, as to control of the liq-

uor traffic, in the constitutional relations between the

States and national authority” by “subordinating

rights under the Commerce Clause to the power of a

State to control . . . the traffic in liquor within its bor-

ders.” United States v. Frankfort Distilleries, 324 U.S.

293, 300 (1945) (Frankfurter, J., concurring).

Section 2 of the Twenty-first Amendment prohib-

its “|t]he transportation or importation into any State

.. . for delivery or use therein of intoxicating liquors,

in violation of the laws thereof.” U.S. CONST. amend.

XXI, §2. As one of the Amendment’s authors ex-

plained, the purpose of Section 2 was “to restore to the

States .. . absolute control in effect over interstate

commerce affecting intoxicating liquors.” 76 Cong.

Rec. 4,143 (Feb. 15, 1933) (statement of Sen. Blaine);

see also id. at 4,145 (Statement of Sen. Wagner) (ex-

pressing concern that a proposed—but ultimately re-

jected—section that would have given Congress con-

current power to regulate liquor was contrary to the

amendment’s purpose “to restore to the States control

of their liquor problem”). Section 2 thus embodied a

compromise that allowed commerce in liquor to re-

sume while ensuring that states could regulate the

distribution and sale of liquor free from the con-

straints of the Commerce Clause.

This compromise was accomplished by effectively

constitutionalizing the gist of the Webb-Kenyon Act

into Section 2. See Granholm, 544 U.S. at 484 (noting

13

that Section 2 “closely follows” the language of the

Webb-Kenyon Act) (quoting Craig, 429 U.S. at 205-

06); see also id. at 514 (Thomas, J., dissenting). As the

Granholm majority explained, Section 2 “restored to

the States the powers they had under the Wilson and

Webb-Kenyon Acts,” id. at 484—including compre-

hensive regulation of in-state retailers and wholesal-

ers free of any restraints otherwise imposed by the

Commerce Clause.

Consistent with that history, this Court’s early

post-ratification cases held that Section 2 gave states

plenary authority to regulate their domestic liquor

markets, even when such regulation involved overt

discrimination against out-of-state liquor products.

For example, in Young’s Market, the Court upheld a

California law imposing a license fee on wholesalers

to import beer. Although the law imposed a “direct

burden on interstate commerce,” the Court held that

the fee was authorized by the Twenty-first Amend-

ment. 299 U.S. at 62. The Court rejected the argu-

ment that states must “let imported liquors compete

with the domestic on equal terms,” finding that this

“would involve not a construction of the Amendment,

but a rewriting of it.” Ibid. The Court reasoned that

the states’ authority to prohibit the manufacture and

sale of beer included the “lesser” power to impose “a

state monopoly of the manufacture and sale of beer”

or to “channelize desired importations by confining

them to a single consignee.” /d. at 63.

For several decades the Court adhered to the orig-

inal view that the Twenty-first Amendment com-

pletely immunized states from all dormant Commerce

Clause challenges. For example, in Mahoney v. Jo-

seph Triner Corp., 304 U.S. 401 (1938), the Court

stated that it was “settled” that “discrimination

14

against imported liquor is permissible” under the

Twenty-first Amendment. /d. at 403 (upholding state

law that “clearly discriminate|d] in favor of liquor pro-

cessed within the State”). Similarly, in Ziffrin, the

Court declared that “(t]he Twenty-first Amendment

sanctions the right of a state to legislate concerning

intoxicating liquors brought from without, unfettered

by the Commerce Clause.” 308 U.S. at 138. In the

same year the Court upheld a Michigan law prohibit-

ing beer dealers from selling any beer manufactured

in a state which discriminated against Michigan be-

cause even if the law could “properly be described as

a protective measure, ... the law [wajs valid.” Jnd.

Brewing Co. v. Liquor Control Comm’n, 305 U.S. 391,

394 (1929); see also Joseph S. Finch & Co. v.

McKittrick, 305 U.S. 395, 397-98 (1939) (“[T)he right

of a State to prohibit or regulate the importation of

intoxicating liquor is not limited by the commerce

clause.”). In short, the Court “made clear in the early

years following adoption of the Twenty-first Amend-

ment” that under Section 2, “a State is totally uncon-

fined by traditional Commerce Clause limitations

when it restricts the importation of intoxicants des-

tined for use, distribution, or consumption within its

borders.” Hostetter v. Idlewild Bon Voyage Liquor

Corp., 377 U.S. 324, 330 (1964).?

* One virtue of the absolutist view expressed in Young’s Mar-

ket and its progeny was that the Court “relieved itself of the

thankless task of trying to define the hazy line between proper

and improper state police and revenue measures where inter-

state business is concerned.” Joseph E. Kallenbach, Interstate

Commerce in Intoxicating Liquors Under the Twenty-First

Amendment, 14 Temple L. Q. 474, 482 (1940). It is difficult to

differentiate “measures appropriate to a policy of strict regula-

tion for ordinary police or revenue purposes, and measures going

Although more recently the Court has held that

state laws enacted solely to protect local liquor prod-

ucts from competition by out-of-state products are not

immunized from dormant Commerce Clause scrutiny,

see Part II.C-D, infra, it has steadfastly maintained

that the “aim of the Twenty-first Amendment was to

allow States to maintain an effective and uniform sys-

tem for controlling liquor by regulating its transpor-

tation, importation, and use.” Granholm, 544 U.S. at

484.

IL. Tats COURT’S PRECEDENTS CONFIRM THAT

STATES RETAIN BROAD AUTHORITY TO STRUC-

TURE THEIR THREE-TIER SYSTEMS

The Court’s recent decisions have clarified that

the Twenty-first Amendment does not authorize the

states to enact alcohol regulations that violate other

constitutional provisions, such as the Equal Protec-

tion Clause and Due Process Clause. Nor may states

beyond them for economic needs.” Ibid.; see also Carter v. Vir-

ginia, 321 U.S. 131, 142 (1944) (Frankfurter, J., concurring) (ar-

guing that allowing courts to determine whether a given liquor

regulation is “reasonably necessary” would “open wide the door

of conflict and confusion which have in the past characterized the

liquer controversies in this Court and in no small measure

formed part of the unedifying history which led first to the Eight-

eenth and then to the Twenty-First Amendment”). As the circuit

split addressed in this case illustrates, Granholm and Bacchus

have created confusion as to the interplay between the Twenty-

first Amendment and the Commerce Clause. Should the Court

be inclined to reconsider those decisions, Justice Brandeis’s

unanimous opinion in Young’s Market provides not only a more

administrable rule for lower courts to apply, but also the best

evidence of the original meaning of Section 2. Cf. McDonald v.

Chicago, 561 U.S. 742, 776-78 (2010) (relying on sources contem-

poraneous to the ratification of the Fourteenth Amendment to

ascertain its original public meaning).

16

regulate outside their jurisdiction by controlling liq-

uor sales on federal enclaves or setting prices in other

states. However, with respect to regulation of in-state

liquor transportation, distribution and sale, the Court

has recognized only a single, narrow exception to the

general immunity states enjoy against dormant Com-

merce Clause challenges: overt attempts by a state to

protect its local alcohol products from competition by

out-of-state products. Aside from that narrow carve-

out, this Court has consistently affirmed that states

have plenary authority over the in-state alcohol-dis-

tribution system, which for many states includes du-

rational-residency requirements for retailers and

wholesalers.

A. Recognizing that Section 2 “primarily created

an exception to the normal operation of the Commerce

Clause,” this Court has held that the Twenty-first

Amendment “does not license the States to ignore

their obligations under other provisions of the Consti-

tution.” Capital Cities Cable, 467 U.S. at 712 (empha-

sis added); see also Young’s Mkt., 299 U.S. at 64 (re-

jecting an argument that authorizing the challenged

“licensed-fee would involve a declaration that the

Amendment has, in respect to liquor, freed the states

from all restrictions upon the police power to be found

in other provisions of the Constitution”). For example,

the Court has held that the Amendment does not give

states authority to: tax imported liquor in violation of

the Export-Import Clause, Dep’t of Rev. v. James

Beam Co., 377 U.S. 341 (1964); insulate the liquor in-

dustry from equal-protection requirements, Craig,

429 U.S. at 204-09; violate due process, Wisconsin v.

Constantineau, 400 U.S. 433, 436 (1971); delegate

zoning authority related to alcohol sales to churches,

Larkin v. Grendel’s Den, Inc., 459 U.S. 116, 122 n.5

17

(1982); or impose advertising bans on liquor that con-

travene the First Amendment, 44 Liquormart, Inc. v.

Rhode Island, 517 U.S. 484 (1996).

The Court also has held that the Twenty-first

Amendment does not authorize states “to regulate in

an area or over a transaction that flalls] outside of its

jurisdiction.” North Dakota, 495 U.S. at 431. For ex-

ample, a state may not: regulate alcohol use within a

national park, see Collins v. Yosemite Park & Curry

Co., 304 U.S. 518 (1938); regulate a transaction be-

tween an out-of-state liquor supplier and a federal

military base, see United States v. Mississippi Tax

Comm’n, 412 U.S. 363 (1973); or tax directly a federal

instrumentality on an enclave over which the United

States exercises concurrent jurisdiction, see United

States v. Mississippi Tax Comm’n, 421 U.S. 599

(1975). The Court has reiterated, however, that

“within the area of its jurisdiction, the State has ‘vir-

tually complete control’ over the importation and sale

of liquor and the structure of the liquor distribution

system.” North Dakota, 495 U.S. at 431 (plurality

opinion) (quoting Midcal Aluminum, 445 U.S. at 110).

B. The Court first suggested that at least some

Commerce Clause challenges to state liquor regula-

tions remained possible in Hostetter, where it asserted

that the Twenty-first Amendment had not “somehow

operated to ‘repeal’ the Commerce Clause wherever

regulation of intoxicating liquors is concerned.” 377

U.S. at 331-32. The Court reasoned that “[i]f the Com-

merce Clause had been pro tanto ‘repealed,’ then Con-

gress would be left with no regulatory power over in-

terstate or foreign commerce in intoxicating liquor.

Such a conclusion would be patently bizarre and is de-

monstrably incorrect.” Jd. at 332. “Both the Twenty-

first Amendment and the Commerce Clause are parts

18

of the same Constitution,” the Court reasoned, and

“each must be considered in light of the other and in

the context of the issues and interests at stake in any

concrete case.” Id. at 332.

Hostetter was not, however, a dormant Commerce

Clause case; it involved the federally regulated sale of

alcohol to passengers departing Idlewild (now JFK)

airport, which the passengers did not even receive un-

til they arrived at their “foreign destination.” 377 U.S.

at 325. In that context, the Court held that New

York’s regulations were an impermissible effort “to

prevent transactions carried on under the aegis of a

law passed by Congress in the exercise of its explicit

power under the Constitution to regulate commerce

with foreign nations.” Jd. at 334.

Applying the same reasoning, the Court has inval-

idated state statutes that authorized or required liq-

uor pricing schemes that violated federal statutes.

See, e.g., Midcal Aluminum, 445 U.S. at 114; 324 Lig-

uor Corp. v. Duffy, 479 U.S. 335, 350 (1987). But these

cases, like Hostetter, did not implicate the dormant

Commerce Clause. Accordingly, neither Hostetter, nor

Midcal Aluminum, nor 324 Liquor called into ques-

tion the principle that states have plenary authority

to structure their in-state distribution systems as they

see fit in the absence of a conflicting exercise of federal

authority. On the contrary, as the Court observed in

Hostetter, the “view of the scope of the Twenty-first

Amendment” expressed in Young’s Market “with re-

spect to a State’s power to restrict, regulate, or pre-

vent the traffic and distribution of intoxicants within

its border has remained unquestioned.” Jd. at 330.

The Court also has recognized that the Twenty-

first Amendment does not authorize states to enact

liquor laws that have the effect of regulating extra-

19

territorially. In Brown-Forman Distillers Corp. v.

New York State Liquor Authority, 476 U.S. 573 (1986),

the Court struck down New York’s price-affirmation

statute, which required liquor distillers and producers

selling to wholesalers within the state to sell at a price

that is no higher than the lowest price the distiller

charges wholesalers in any other state. The effect of

the statute was to give New York control over prices

in other states. The Court recognized that the

Twenty-first Amendment “gives New York only the

authority to control sales of liquor in New York, and

confers no authority to control sales in other States.”

Id. at 585. And in Healy v. The Beer Institute, 491 U.S.

324 (1989), the Court reaffirmed that “to the extent

that an affirmation statute has the practical effect of

regulating out-of-state liquor prices, it cannot stand

under the Commerce Clause irrespective of the

Twenty-first Amendment.” Id. at 342.

In short, the text of the Twenty-first Amendment

makes clear that the “Commerce Clause operates with

full force whenever one State attempts to regulate the

transportation and sale of alcoholic beverages des-

tined for distribution and consumption in a foreign

country, or another State.” Brown-Forman, 476 U.S.

at 585. But this is less a “limitation” on (or a Com-

merce Clause “exception” to) the Twenty-first Amend-

ment than a feature of our federal system of govern-

ment. State power to impose burdens on interstate

commerce is “not only subordinate to the federal

power over interstate commerce, but is also con-

strained by the need to respect the interests of other

States,” which have “autonomy .. . within their re-

spective spheres.” BMW of North America, Inc. v.

Gore, 517 U.S. 559, 571 (1996) (quoting Healy, 491

U.S. at 335-36). The Court’s cases dealing with extra-

20

territorial regulation reflect the fact that the Amend-

ment was never intended to authorize one state to in-

vade the police powers of sister states or defy the au-

thority of the federal government. The Amendment

simply does not apply in those situations. Those cases

thus have little to say about regulations of in-state

wholesalers and retailers, and in no way undermine

the validity of regulations structuring states’ liquor

distribution systems. Indeed, the Court in Brown-

Forman reiterated that states have authority “to reg-

ulate the importation and distribution of liquor within

their territories.” 476 U.S. at 584.

C. The Court made a more dramatic turn from

the Young’s Market understanding of Section 2 in Bac-

chus, which involved a dormant Commerce Clause

challenge to a Hawaii law that exempted two locally

produced liquors from the 20 percent excise tax im-

posed on sales of liquor at wholesale. Throughout the

litigation, Hawaii offered no Twenty-first Amendment

justification (such as temperance, etc.) for the law, but

rather defended it solely as an “aid [to] Hawaiian in-

dustry.” Id. at 271. Indeed, “the State expressly dis-

claimed any reliance upon the Twenty-first Amend-

ment in the court below and did not cite it in its mo-

tion to dismiss or affirm.” /d. at 274 n.12. Although

the state belatedly attempted to rely on the Amend-

ment in its merits briefing, ibid., it continued to

acknowledge that the “purpose” of the tax “was ‘to pro-

mote a local industry.” Id. at 276. In this context, the

Court held that the relevant “question” was “whether

the principles underlying the Twenty-first Amend-

ment are sufficiently implicated by the exemption for

okolehao and pineapple wine to outweigh the Com-

merce Clause principles that would otherwise be of-

fended.” Id. at 275 (emphasis added).

21

Although the Court did not enumerate those prin-

ciples, it stated that “one thing is certain: The central

purpose of the provision was not to empower States to

favor local liquor industries by erecting barriers to

competition.” Bacchus, 468 U.S. at 276. Accordingly,

the Court held that “State laws that constitute mere

economic protectionism are therefore not entitled to

the same deference as laws enacted to combat the per-

ceived evils of an unrestricted traffic in liquor.” Ibid.

Because Hawaii conceded that the law was designed

mereiy “to foster the local industries by encouraging

increased consumption of their product,” id. at 269,

the Court held that the tax “violate|d! a central tenet

of the Commerce Clause but [was] not supported by

any clear concern of the Twenty-first Amendment.”

Id. at 276.

Bacchus thus carved out a very narrow subset of

state laws from the broad immunity otherwise af-

forded by the Twenty-first Amendment—namely,

laws enacted purely to protect local liquor manufac-

turers from competition, thereby discriminating

against out-of-state products.

D. The Court’s most recent Twenty-first Amend-

ment decision—Granholm—is consistent with the

view that Section 2 provides states with plenary au-

thority to regulate the structure of their in-state dis-

tribution systems unfettered by the Commerce Clause

so long as their regulations are not aimed at protect-

ing in-state liquor products from competition by out-

of-state products.

In Granholm, the Court addressed two state li-

censing regimes (Michigan and New York) that placed

out-of-state wineries at a competitive disadvantage

vis-a-vis in-state wineries. Michigan authorized in-

state wineries to obtain a license allowing them to

22

ship directly to consumers, but required out-of-state

wineries to distribute their products “through [Michi-

gan’s| three-tier system.” 544 U.S. at 468-69. “These

two extra layers of overhead increase[d] the cost of

out-of-state wines to Michigan consumers.” /d. at 474.

Similarly, New York “channell[led) most wine

sales through the three-tier system,” but “allow/ed] lo-

cal wineries to make direct sales to consumers in New

York on terms not available to out-of-state wineries.”

544 U.S. at 470. This was just “an indirect way of sub-

jecting out-of-state wineries, but not local ones, to the

three-tier system,” increasing costs for out-of-state

wineries. Id. at 474.

The states argued that the Twenty-first Amend-

ment authorized their discriminatory licensing re-

gimes, but a narrow majority of the Court rejected

that argument. First, the Court held that the Wilson

Act and Webb-Kenyon Act “did not displace) the

Court’s line of Commerce Clause cases striking down

state laws that discriminated against liquor produced

out of state.” 544 U.S. at 483. Second, the Court held

that “(t]he Amendment did not give States the author-

ity to pass nonuniform laws in order to discriminate

against out-of-state goods, a privilege they had not en-

joyed at any earlier time.” 544 U.S. at 484-85 (empha-

sis added). Because Michigan and New York’s three-

tier system applied “only for sales from out-of-state

wineries,” id. at 467, the Court held that the chal-

lenged laws “involveld| straightforward attempts to

discriminate in favor of local producers” and thus

were “not saved by the Twenty-first Amendment,” id.

at 489. In this regard, Granholm involved the same

type of overt discrimination against out-of-state prod-

ucts at issue in Bacchus. Id. at 488-89.

23

Justice Thomas, joined by the Chief Justice and

Justices Stevens and O’Connor, dissented. Although

he agreed that the Twenty-first Amendment unques-

tionably allows states to control their liquor distribu-

tion systems, Justice Thomas would have held that

the Webh-Kenyon Act and Twenty-first Amendment

both displace any negative Commerce Clause barrier

to state regulation of liquor sales to in-state consum-

ers, even if those regulations discriminate against

out-of-state liquor. 544 U.S. at 497-98, 517-18

(Thomas, J., dissenting). Justice Thomas noted that

following ratification of the Twenty-first Amendment,

“|mjany States had laws that discriminated against

out-of-state products in addition to out-of-state whole-

salers and retailers.” 544 U.S. at 518-19 (Thomas, J.,

dissenting) (discussing state statutes); see also Inter-

state Commerce, 14 Temple L.Q. at 483 (noting that

34 states had laws that “discriminate|d] against out-

of-state alcoholic beverages) (citation omitted). He ar-

gued that this “contemporaneous state practice re-

futeld) the Court’s assertion that the Twenty-first

Amendment allowed States to discriminate against

out-of-state wholesalers and retailers, but not against

out-of-state products.” Granholm, 544 U.S. at 520.

Although the Court was closely divided as to

whether the Twenty-first Amendment allows states to

engage in protectionism designed to disadvantage out-

of-state products—largely because they disagreed

about the history and scope of the Wilson Act and

Webb-Kenyon Act—all nine Justices agreed that the

Twenty-first Amendment authorizes states to “man-

date a three-tier distribution scheme in the exercise of

their authority under the Twenty-first Amendment.”

Id. at 466; see also id. at 520 (Thomas, J., dissenting).

As the majority opinion therefore took pains to em-

24

phasize, Granholm did not “call into question the con-

stitutionality of the three-tier system.” Jd. at 488. Ra-

ther, it held that “State policies are protected under

the Twenty-first Amendment” so long as “they treat

liquor produced out of state the same as its domestic

equivalent.” 544 U.S. at 489. Indeed, Granholm spe-

cifically observed that states have “virtually complete

control over whether to permit importation or sale of

liquor and how to structure the liquor distribution sys-

tem.” Id. at 488 (emphasis added) (quoting Midcal

Aluminum, 445 U.S. at 110).

Of particular note, in emphasizing the “unques-

tionablle] legitimalcy|” of the three-tier system, the

Granholm majority quoted approvingly Justice

Scalia’s concurring opinion in North Dakota, which

had expressly recognized that the Twenty-first

Amendment “empowers North Dakota to require that

all liquor sold for use in the State be purchased from

a licensed in-state wholesaler.” Granholm, 544 U.S.

at 489 (quoting North Dakota, 495 U.S. at 447 (Scalia,

J., concurring)). Thus, even under Granholm and

Bacchus, state regulation of in-state liquor distribu-

tion and sale—including through a three-tier system

that incorporates residency and duration require-

ments—is shielded from dormant Commerce Clause

scrutiny.

Iti. DURATIONAL-RESIDENCY REQUIREMENTS

ARE WITHIN THE POWER RESERVED TO THE

STATES By SECTION 2

As part of its three-tier system of liquor regula-

tion, Tennessee imposes reasonable durational-resi-

dency requirements on retailers and wholesalers.

Residency requirements are designed to promote the

very interests the Twenty-first Amendment author-

izes states to protect—including temperance, crime

25

prevention, and tax collection. And a duration re-

quirement merely establishes the minimum time a

particular state decides is reasonably necessary for a

retailer or wholesaler to become sufficiently rooted in

the community; it thus demarcates bona fide resi-

dents from those deemed insufficiently established in

the community to help protect those interests. Here,

Tennessee’s durational-residency requirements fulfill

that Twenty-first Amendment role, and do not exceed

reasonable limits on the state’s legislative choices.

They are thus immunized from scrutiny under the

dormant Commerce Clause.

A. The compromise memorialized in the Twenty-

first Amendment granted each state authority to reg-

ulate liquor within its jurisdiction in the manner that

best fits its particular circumstances. Most states

have used this authority to regulate liquor distribu-

tion through the three-tier system. Sparks, 30 N. Ill.

U. L. Rev. at 486-87. Historically, “[t}he main purpose

of the three-tier system was to preclude the existence

of a ‘tied’ system between producers and retailers, a

system generally believed to enable organized crime

to dominate the industry.” Arnold’s Wines, 571 F.3d

at 187; see also Sparks, 25 N. Ill. U. L. Rev. at 488.

“Some courts have also recognized the prevention of

monopolies” as a valid state interest furthered by the

three-tier system, Dickerson v Bailey, 336 F.3d 388,

404 (5th Cir. 2003), while others have noted states’ in-

terests in “promotion of orderly markets,” Costco

Wholesale Corp. v. Maleng, 522 F.3d 874, 902 n.23

(9th Cir. 2008). States have also long “assert\|ed] that

the three-tier regulatory system allows the state to

collect taxes more efficiently and prevent the sale of

alcohol to minors.” Arnold’s Wines, 571 F.3d at 188;

see also Sparks, 30 N. Ill. U. L. Rev. at 488. Some

states have also adopted a three-tier system as a way

26

of promoting temperance. Daniel Glynn, Granholm’s

Ends Do Not Justify the Means: The Twenty-First

Amendment’s Temperance Goals Trump Free-Market

Idealism, 8 J.L. Econ. & Pol’y 113, 133 (2011). Today,

the three-tier system serves many of these same pur-

poses while protecting citizens from the negative con-

sequences of adulterated or counterfeit products, eva-

sion of state excise taxes, sales to underage and intox-

icated consumers, and drunk driving, among other

harms.

Wholesalers are the vital middle tier in this well-

established system, linking producers and retailers.

Since products must generally pass through a whole-

saler, wholesalers play an indispensable role in states’

regulation of the alcohol marketplace. For many

states, wholesalers are the single point of excise tax

collection. Wholesalers help ensure that liquor dis-

tributed to retailers is genuine and unadulterated.

They also promote competition by providing distribu-

tion logistics to small brands and retailers, enabling

them to compete effectively with large national

brands and chains, fostering consumer choice. And

wholesalers act as a central authority for developing

and implementing comprehensive policies on the pre-

vention of underage access and drunk driving. See

generally Roni A. Elias, Three Cheers for Three Tiers:

Why the Three-Tiers System Maintains Its Legal Va-

lidity and Social Benefits After Granholm, 14 DePaul

Bus. & Com. L.J. 209 (2015).

As part of their three-tier systems, many states

“limit the issuance of retail, wholesale, and manufac-

turing licenses to residents of the state or to domestic

corporations.” Note, Economic Localism in States Al-

coholic Beverage Laws—Experience Under the

Twenty-First Amendment, 72 Harv. L. Rev. 1145, 1148

27

(1959); see also Granholm, 544 US. at 518 n.6

(Thomas, J., dissenting) (listing state statutes with

residency and physical presence requirements).

States reasonably view such residency requirements

as a legitimate exercise of their Twenty-first Amend-

ment authority.

Most importantly, residency requirements ensure

that someone within the state’s jurisdiction can be

held accountable. For example, Tennessee justifies its

residency requirements for retailers on the ground

that “it is in the interest of thle] state to maintain a

higher degree of oversight, control and accountability

for individuals involved in” liquor retailing. Tenn.

Code Ann. § 57-3-204(b)(4). Similarly, because resi-

dency “facilitates law enforcement against wholesal-

ers,” states use residency requirements “for close con-

trol over the licensees and for amenability to prosecu-

tion.” Economic Localism, 72 Harv. L. Rev. at 1149.

States may reasonably believe that local wholesalers

are more likely than their out-of-state counterparts to

fear prosecution by the state and thus to conform their

conduct to state policy.

Residency requirements also reflect the reasona-

ble belief that in-state wholesalers and retailers may

be “more apt to be socially responsible” and thus bet-

ter suited than out-of-state counterparts to promote

temperance. After all, in-state “officers, directors, and

owners are residents of the community and thus sub-

ject to negative externalities—drunk driving, domes-

tic abuse, underage drinking—that liquor distribution

may produce.” Southern Wine & Spirits, 731 F.3d at

811. A legislature could “sensibly . . . suppose” that

state residents “are more likely [than non-residents]

to respond to concerns of the community, as expressed

by their friends and neighbors whom they encounter

28

day-to-day in ballparks, churches, and service clubs.”

Ibid.

Similarly, states reasonably view residency re-

quirements as an effective tool for ensuring that the

infrastructure for in-state liquor distribution remains

subject to state oversight. Many states, for example,

require wholesalers to maintain their warehouses in-

state to facilitate inspections and promote oversight.

Three Cheers for Three Tiers, 14 DePaul Bus. & Com.

L.J. at 219. Given their susceptibility to prosecution

and their exposure to the negative consequences

sometimes caused by liquor, in-state wholesalers and

retailers are also likely to be more vigilant about pre-

venting “unlawful diversion of liquor” from regulated

to unregulated channels. North Dakota, 495 U.S. at

431. States may also believe that they can better rely

on in-state wholesalers to collect any applicable excise

taxes and on in-state retailers to collect sales taxes,

see, e.g., Wis. Stat. § 125.01—an especially weighty

concern for states confronting budget deficits. Indeed,

these interests are why states reasonably can require

that “all liquor sold for use in the State be purchased

from a licensed in-state wholesaler.” North Dakota,

495 U.S. at 447 (Scalia, J., concurring in the judg-

ment).

Many states expressly identify these Twenty-first

Amendment interests as the reasons for their chosen

distribution systems generally—and for residency re-

quirements specifically. See, e.g., Tenn. Code Ann.

§ 57-3-204(b)\(4); Ind. Code Ann. § 7.1-1-1-1; Mo. Rev.

Stat § 311.015; Wis. Stat. Ann. § 125.01. For these

states, and others like them that require in-state res-

idency for wholesalers and retailers, “an argument

that compares the status of an in-state retailer with

an out-of-state retailer” is “nothing different than an

29

argument challenging the three-tier system itself.”

Brooks v. Vassar, 462 F.3d 341, 352 (4th Cir. 2006)

(op. of Niemeyer, J.); Arnold’s Wines, 571 F.3d at 190.

Yet this Court has repeatedly held that the three-tier

system is “unquestionably legitimate.” Granholm,

544 U.S. at 489 (quoting North Dakota, 495 U.S. at

432).

B. States implementing liquor distribution sys-

tems after Prohibition “[o]/ften” required “a fixed pe-

riod of prior residence” to obtain a retailer or whole-

saler license. Economic Localism, 72 Harv. L. Rev. at

1148. Today, 15 states impose some form of dura-

tional-residency requirement for wholesalers, with

some states requiring as little as 30 days of residence

and others requiring as long as five years.’ Even more

states impose durational residency requirements for

retailers. See Petn. 24 n.3.

These requirements are supported by the same in-

terests that justify a residency rule in the first place—

a state surely has a significant interest in determining

the minimum residency it deems necessary for pur-

poses of alcohol regulation. As Judge Sutton recog-

nized, if states may “require retailers and wholesalers

to reside within their borders”—which Granholm has

said they may—they “must ‘have flexibility to define

the requisite degree of in-state presence’ necessary for

® Ariz. Admin. Code § R19-1-201(AX1\(b) (residency); Ark.

Code Ann. § 3-4-606(a)(b) (five years); Ind. Code Ann. § 7.1-3-21-

3 (five years); Ky. Rev. Stat. Ann. § 243.100(1)(f) (one year); La.

Stat. Ann. § 26:80(A)(2) (two years); Me. Rev. Stat. tit. 28-A,

§ 1401(5) (six months); Md. Code Ann., Alcoholic Beverages, § 3-

102 (two years); Mo. Rev. Stat § 311.060.2(3)-3 (three years);

N.C. Gen. Stat. Ann. § 18B-900(aX2) (residency); Okla. Stat.

Ann. tit. 37A, § 2-146(A\(1) (five years); S.C. Code Ann. § 61-6-

110(2) (30 days); Tenn. Code Ann. § 57-3-203(bX 1) (two years);

Wis. Stat. Ann. § 125.04(5\(a)2 (90 days).

30

participating as a retailer or wholesaler.” Pet. App.

50a (quoting S. Wine, 731 F.3d at 810). In other

words, each state must be free to choose a period of

time that, in its reasonable judgment, shows that the

residency is not only bona fide but also is likely to lead

to the types of community ties that would make the

resident sufficiently attuned to the concerns of the

resident’s new community. And it is certainly reason-

able for a state legislature to believe that “[rlequiring

individual retailers to reside in one place for a sus-

tained, two-year period ensures that they will be

knowledgeable about the community’s needs and com-

mitted to its welfare.” Pet. App. 50a. It is also rea-

sonable for states to conclude that a period of sus-

tained in-state presence helps to ensure accountabil-

ity to government authorities, facilitate the task of

regulators in vetting applications, increase their fa-

miliarity with regulated parties, ease inspections of

storage facilities and required records, and mete out

any required discipline—all interests at the core of the

states’ Twenty-first Amendment powers. A person

who lacks sufficient ties to the community is less

likely to feel a sense of accountability and therefore is

a greater risk of being a “fly by night” who ignores

public safety concerns.

This is not to say, of course, that states may im-

pose any sort of durational-residency requirement.

Under even the most deferential standard of review, a

durational-residency requirement that is wholly irra-

tional could be struck down under the Equal Protec-

tion Clause or other constitutional provision. For ex-

ample, a state could be prohibited from requiring that

every living relative of a prospective wholesaler reside

in the state—not because such restrictions violate the

dormant Commerce Clause, but because they are not

31

a reasonable exercise of the state’s authority to regu-

late alcohol distribution within its borders. In fact,

Judge Sutton concluded that Tennessee’s rule requir-

ing 10-year residency for a license renewal was “the

epitome of arbitrariness” in light of the two-year re-

quirement for the initial license. Pet. App. 55a. Here,

however, it was not unreasonable for Tennessee to de-

termine that two years of residence are necessary for

a would-be retailer or wholesaler to become suffi-

ciently integrated in the community and committed to

its welfare. Courts must accord due deference to

states’ choices in determining how best to meet the

needs of their respective circumstances.

This deference is not diminished by recent

changes in technology. Although this Court has revis-

ited its dormant Commerce Clause jurisprudence in

other contexts in light of “the Internet revolution” and

the changing dynamics of “[m]odern e-commerce,” the

Court has been careful not to infringe “on States’ au-

thority to collect taxes and perform critical public

functions.” South Dakota v. Wayfair, Inc., 138 S. Ct.

2080, 2095, 2097 (2018). Where alcohol is concerned,

those critical public functions include imposing dura-

tional residency requirements on both retailers and

wholesalers to ensure that the three-tier system ful-

fills its purposes. In any event, states are not obli-

gated to embrace every aspect of the Internet econ-

omy—especially when the product concerned has the

capacity to inflict societal harms if abused. The

Twenty-first Amendment permits states to choose

from a spectrum of options in regulating the use and

distribution of liquor within their borders, and courts

are not empowered to assess the wisdom of these

choices or to determine whether they need “updating”

in light of new commercial realities.

32

C. The Sixth Circuit majority struck down Ten-

nessee’s durational residency requirements because,

in its view, “a three-tier system can still function with-

out these restrictions.” Pet. App. 27a. In so holding,

however, the panel countermanded the Tennessee leg-

islature’s reasonable judgment that durational-resi-

dency requirements best serve the policy interests un-

derlying Tennessee’s three-tier system. It is no an-

swer to say that that durational-residency require-

ments are not “inherent” in the three-tier system, Pet.

App. 27a. No state is required by the Amendment to

adopt a particular form of the three-tier system, and

thus the Sixth Circuit’s distinction between those at-

tributes of the system that are “inherent” or somehow

essential has no footing in the Constitution. Indeed,

the three-tier system itself is not essential, but this

Court has never held that the system is invalid merely

because a state could do without it. See Granholm,

544 U.S. at 488.

Nor is there any constitutional basis for upholding

in-state residence requirements but not durational-

residency requirements. See Cooper v. Tex. Alcoholic

Beverage Comm’n, 820 F.3d 730, 743 (5th Cir. 2016).

Nothing in the Twenty-first Amendment’s text or his-

tory supports a distinction between according states

the power to require “residency” but denying them the

authority to define what residency means by stipulat-

ing a particular period of time. Nor are there any ob-

vious judicially manageable standards that would

permit courts throughout the country to know when

the legislative choice between x and y years exceeds

constitutional bounds—at least absent statutory peri-

ods bordering on irrationality or demonstrably offen-

sive to other constitutional provisions. Indeed, a

dormant Commerce Clause challenge provides an es-

33

pecially incongruous context to make such distinc-

tions, since the Twenty-first Amendment was ex-

pressly meant to preclude such challenges.

The point of Section 2 was to give each state the

power to chart its own course in liquor regulation. But

applying the Sixth Circuit’s test would lead to the

elimination of all Twenty-first Amendment immunity.

For example, at least one court applying Byrd's “in-

herent” aspect test has struck down portions of Mich-

igan’s three-tier system that distinguish between in-

state and out-of-state retailers, not merely products.

See Lebamoff Enter. v. Snyder, No. 17-10191, 2018 WL

4679612, at *5 (E.D. Mich. Sept. 28, 2018). That rul-

ing, like the Sixth Circuit’s decision, strikes at the

heart of states’ authority to structure their three-tier

systems as they think best. Moreover, as both deci-

sions fail to appreciate, the fact that some states have

adopted specific regulations—such as durational-resi-

dency requirements—while others have not is a fea-

ture of the Twenty-first Amendment’s grand compro-

mise, not a judicially-correctable “defect.”

Indeed, a state is free to dispense with the three-

tier system entirely and instead implement a state

monopoly ~ er distribution—and some states have

chosen to do. See National Alcohol Beverage Control

Association, Control State Directory and Info,

https://www.nabca.org/control-state-directory-and-

info (last visited Nov. 12, 2018). If states are prohib-

ited from defining requirements for distribution chan-

nels to address local concerns, more states may elect

to implement a state monopoly. Thus, a decision hold-

ing that states lack authority to set durational-resi-

dency requirements may lead to a dampening of pri-

vate market forces, not a free-market panacea, as

states choose to exercise even greater control through

34

state-run distribution systems. Policy arguments

against “protectionism” may carry the day in other

contexts, but they should not prevail here because the

Twenty-first Amendment gives states “nearly unfet-

tered” authority to structure their liquor distribution

systems to mitigate the negative consequences that

sometimes result from alcohol consumption and foster

public accountability.

* * a

Durational-residency requirements are a legiti-

mate exercise of state regulatory authority under the

Twenty-first Amendment. A decision categorically in-

validating those requirements under the dormant

Commerce Clause would call into question the valid-

ity of the three-tier system itself and start the Court

down the path of effectively reading Section 2 out of

the Twenty-first Amendment. This Court should de-

cline Respondents’ invitation to rewrite the Constitu-

tion.

CONCLUSION

The Court should reverse the Sixth Circuit’s deci-

sion.

Respectfully submitted.

JO MOAK MIGUEL A. ESTRADA

General Counsel Counsel of Record

JACOB HEGEMAN Lucas C. TOWNSEND

WINE & SPIRITS WHOLESALERS NATHAN H. JACK

OF AMERICA, INC. GIBSON, DUNN & CRUTCHER LLP

805 15th Street, NW, Ste. 1120 1050 Connecticut Avenue, N.W.

Washington, DC 20005 Washington, DC 20036

(202) 955-8500

mestrada@gibsondunn.com

November 20, 2018