Reply Brief — National Wine Wine & Spirits, Inc. v. Michigan (No. 07-336)

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No. 07-336 :

NOV § - 2097

OF ACE OF TT CLERK

In The L Sushi s 6 COUT, US.

Supreme Court of the Gnited States

NATIONAL WINE AND SPIRITS, INC.,

NWS MICHIGAN, INC.,

and NATIONAL WINE & SPIRITS, L.L.C.,

Petitioners,

STATE OF MICHIGAN and

MICHIGAN BEER & WINE WHOLESALER ASSOC.,

Respondents.

On Petition For A Writ Of Certiorari

To The Court Of Appeals Of Michigan

REPLY BRIEF

LOUIS B. REINWASSER LAWRENCE C. MARSHALL

MILLER, CANFIELD, PADDOCK (Counsel of Record)

& STONE, P.L.C. Crown Quadrangle

One Michigan Avenue, 559 Nathan Abbott Way

. Suite 900 Stanford, California 94306

Lansing, Michigan 48933 (650) 723-7572

MORTON SIEGEL

SIEGEL, MOSES &

SCHOENSTADT, P.C.

444 N. Michigan Avenue,

Suite 2600

Chicago, Illinois 60611

COCKLE LAW BRIEF PRINTING CO (800) 225-6964

OR CALL COLLECT (402) 342 2831

TABLE OF CONTENTS

Page

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TABLE OF AUTHORITIES........cccoccccscscessccsscocsscsees ill

REPLY BRIEF OF PETITIONERS ..................000000 1

TABLE OF AUTHORITIES

Page

CASES

C & A Carbone Inc. v. Town of Clarkstown, 511

pa 9

Exxon Corp. v. Governor of Maryland, 437 U.S.

PRY es 25 | SE A ea 8,9

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

Guinn v. United States, 238 U.S. 347 (1915)............ 10

Halliburton Oil Well Cementing Co. v. Reily,

SFO ee ee eteticcrctenicesennecsceececeedess 4

National Paint & Coatings Assoc. v. City of

Chicago, 45 F.3d 1124 (7th Cir. 1995), cert.

Ceri, GUD U7, TGR Cit eicevecessaccoccceccoscccccsccvssees g

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

CTO) cisisedcikeicane te edi etnitgatetorsceeeenevees 6, 7

Piazza’s Seafood World v. Odom, 448 F.3d 744

Ra a ee cccsncensovencoevees 9

Ward v. Maryland, 12 Wall. 418 (1871)....................06 5

STATUTORY PROVISIONS

Mich. Comp. Laws § 436.1205 00.0.0... eeeeeeeeeeee 2,3, 5

Mich. Comp. Laws § 436.1601 ...............c.cscssscssscesees 2,3

REPLY BRIEF FOR THE PETITIONER

The parties are in agreement that Michigan

forbids non-Michigan residents from holding wine

wholesaler licenses. Yet, nowhere in respondents’

briefs in opposition do they attempt to assert any

legitimate state interest in this discrimination

against out-of-state companies. Nor do they address

petitioners’ claim that the appropriate resolution of

this case is a GVR in light of Granholm v. Heald, 544

U.S. 460 (2005). Instead, respondents seek to muddy

the water by asserting various claims about how

petitioners have litigated this case and about the

actions petitioners have taken in response to the

statute’s discrimination against out-of-state resi-

dents. Respondents also seek to rely upon passages

from this Court’s opinions that bear no relevance to

the issues at hand. None of the claims that respon-

dents have advanced advise against this Court grant-

ing this petition for certiorari, vacating the decision of

the Michigan Court of Appeals, and remanding for

reconsideration in light of Granholm (or, in the alter-

native, simply granting certiorari in this case).

1. Throughout this litigation, petitioners have

based their claims on the injuries they have suffered

because Michigan does not allow out-of-state resi-

dents to hold wine wholesaler licenses (and did

not allow that in 1996 — when the rights at issue

were frozen in place). Petitioners have challenged

that portion of Michigan’s liquor statute that allows

some Authorized Distribution Agents (“ADAs”) to

compete robustly within the wholesale wine market

but forbids other ADAs from doing the same. There is

no dispute that the only ADAs who can enjoy this

benefit are ADAs who were in-state residents as of

1996 — and were therefore able to hold wholesale

wine licenses at that time, resulting in a protected

wine market of approximately 20,000 brands. No out-

of-state residents are included in that class because a

Michigan statute (then and now) explicitly precludes

out-of-state residents from securing wholesale wine

licenses at all. This is the very sort of discrimination

against out-of-state interests that the Court con-

demned in Granholm.

Respondents misunderstand the nature of this

claim when they assert that petitioners did not

challenge a statute forbidding out-of-state companies

from acquiring wine wholesaler licenses. See State’s

BIO 11; Michigan Beer and Wine Wholesalers Asso-

ciation (“MBWWA”) BIO 12, 18. A key element of

petitioners’ Commerce Clause challenge is — and

always has been — that the vice of the ADA statute

(Mich. Comp. Laws § 436.1205) is that it explicitly

incorporates the wine-wholesaling statute’s (Mich.

Comp. Laws § 436.1601) unconstitutional discrimina-

tion against out-of-state residents.

Respondent MBWWA cites to a comment i

Justice Markman’s opinion stating that petitioners

have not properly challenged the residency require-

ment statute. See MBWWA BIO 18. All that matters

here, however, is that petitioners undeniably chal-

lenged the statute affecting them that incorporates

this discrimination against out-of-state residents.

Here is what petitioners wrote about this issue, in a

section of their brief entitled “Section 205(3) Dis-

criminates on its Face”:

As a matter of law under § 601 * * * every wine

wholesaler had to be a Michigan resident for a

year prior to obtaining its wine wholesalers’ li-

cense. Because the various provisions of the

1998 Code must be read and construed as one

law, the requirement in §601 that a wine

wholesaler be a Michigan company must be in-

corporated into the language of § 205(3) just as

if it had been written there. * * * Had § 205(3)

expressly limited the right to dual to “Michi-

gan” companies, there would be no question

that it violated the Commerce Clause. The fact

that the limitation is written in § 601 of the

1998 Code is of no moment for this Commerce

Clause analysis.

Appellant’s Brief on Appeal to the Michigan Supreme

Court at 17-18. This case has always been about

§ 436.1205’s incorporation of § 436.1601 and squarely

challenges the residency requirement as applied to

petitioners, in the context of the injury they continue to

sustain as a result of the enforcement of § 436.1205.

2. As a practical matter, Michigan’s discrimina-

tory scheme has forced petitioners to take several

actions in order to viably compete with other ADAs

who, as in-state residents as of 1996, are not bur-

dened by the statute’s treatment of out-of-state

residents. First, in 1999, petitioners created a Michi-

gan entity that qualifies as an in-state resident. This

post-1996 development has no impact, of course, on

petitioners’ rights to “dual” under the ADA statute,

which focuses on whether petitioners were in-state

residents and were licensed as of 1996. Nonetheless,

according to respondents, petitioners’ ability to qual-

ify as an in-state resident in 1999 demonstrates the

absence of discrimination against out-of-state compa-

nies because any out-of-state entity, including NWS,

could have done this before 1996 as well. See State’s

BIO 9, 12; MBWWA BIO 13, 17.

This argument renders the Commerce Clause’s

anti-discrimination requirement a nullity. It is always

true that an out-of-state company could move in-state

and then be treated as an in-state resident. According

to respondents, each of the 50 states could force an out-

of-state company to incorporate within its state in order

to do business. Yet the entire point of the anti-

discrimination requirement is that states may not force

entities to become in-state residents in order to enjoy

the same benefits available to in-state residents.

Granholm makes this clear. In discussing the

New York statute’s provision allowing out-of-state

wineries to sell in-state provided they established a

New York presence (an opportunity available to all

out-of-state companies) the Court rejected the argu-

ment that this mitigated the discrimination. The

Court explained:

New York’s in-state presence requirement

runs contrary to our admonition that States

cannot require an out-of-state firm “to be-

come a resident in order to compete on equal

terms.” Halliburton Oil Well Cementing Co.

v. Reily, 373 U.S. 64, 72 (1963). See also

Ward v. Maryland, 12 Wall. 418 (1871).

Granholm, 544 U.S. at 475.

3. Respondent MBWWA also spends much space

emphasizing that any out-of-state entity is allowed

under the statute to acquire an in-state entity with

wine wholesaler licenses. MBWWA BIO 16-17. In-

deed, petitioners have been forced by § 436.1205’s

restriction on competition to do just that, and have

acquired L & L Wine & Liquor Corporation. See App.

to MBWWA BIO 15-20. They have done this specifi-

cally to be able to sell some pre-1996 wine brands.

Yet, even with this acquisition, many other brands

remain off limits to petitioners.

Far from mitigating the effects of Michigan’s dis-

criminatory system, however, this transaction highlights

the ways in which petitioners have been injured. Instead

of simply having the right to act as both an ADA and a

“dualing” wine wholesaler — a right petitioners’ key in-

state competitors enjoy because of their pre-1996 in-state

residency — petitioners had to spend $18 million to

acquire an in-state company in order to secure these

rights and level the playing field to some small extent.

Id. at 19. This is hardly non-discriminatory. Moreover, if

Michigan is allowed to force out-of-state entities to pay

millions to in-state residents to acquire rights that in-

state residents could have acquired for free, then the 49

other states can do this as well. See Granholm, 544 U.S.

at 475 (“For most wineries, the expense of establishing

a bricks-and-mortar distribution operation in one

State, let alone «' 50, is prohibitive.”). It is difficult to

understand how respondent can point to this acquisi-

tion (or the general right to make such acquisitions)

as evidence that the statute does not discriminate

against out-of-state entities. See Granholm, 544 U.S.

at 475 (holding that extra costs that New York’s in-

state presence requirement imposed on out-of-state

companies were part of the unconstitutional dis-

crimination against out-of-state wineries).

4. In Granholm, this Court held that the prohibi-

tion on discrimination against out-of-state commerce

applies in full force to liquor regulation — that the Twenty-

First Amendment does not immunize such discrimination

from normal Commerce Clause scrutiny. Nonetheless,

respondents cling to one sentence in Granholm, which

they claim endorses Michigan’s requirement that only in-

state residents may hold liquor licenses. See State’s BIO

12; MBWWA BIO 19. Responding to the argument that

allowing out-of-state liquor shipments threatens the

traditional three-tier system of liquor regulation, the

Court in Granholm stated

We have previously recognized that the

three-tier system itself is “unquestionably

legitimate.” North Dakota v. United States,

495 U.S., at 432. See also id., at 447 (Scalia,

J., concurring in judgment) (“The Twenty-

first Amendment ... empowers North Da-

kota 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 (emphasis added).

The sentence in question clearly supports a

state’s right to require that liquor wholesalers be

licensed by the state. Indeed, Granholm has a num-

ber of passages recognizing that out-of-state entities

are not immune from even-handed licensing or per-

mitting requirements. See Granholm, 544 U.S. at 491

(“licensing and self-reporting requirements” may be

imposed on out-of state shippers); ibid. (New York

could protect its legitimate interests by “requiring a

permit” as it does for in-state shippers); id. at 492

(states may impose an “evenhanded licensing require-

ment”). None of this, however, in any way endorses a

state’s ability to restrict those licenses to in-state resi-

dents, as asserted by respondents.’ States may certainly

utilize a three-tier structure to regulate liquor sales.

Granholm makes clear, though, that states may not hide

behind the label of “structure” to create a scheme

that discriminates against out-of-state commerce. Yet,

* The quotation in Granholm upon which respondents focus is

from Justice Scalia’s concurring opinion in North Dakota v. United

States, 495 U.S. 423, 432 (1990). That case had nothing to do with

claimed discrimination against out-of-state residents. Rather, it

involved a claim by the United States that North Dakota was

unduly burdening the federal government in its regulation of

shippers who avoided North Dakota’s taxing and licensing struc-

tures by shipping directly to Air Force bases operated by the United

States Department of Defense. North Dakota did not bar such

shipments, but did require that such shippers affix labels indicat-

ing that the product was to be consumed only on the federal

enclave. The Court upheld this regulation. The language quoted by

respondents indicates only that a state may require a liquor

distributor to have an in-state license — not that it has to be an in-

state resident.

respondents insist on using the mantra “structure” as

dispositive to a claim of discrimination. See State’s

BIO 10 (this “case involves only the structure of

Michigan’s in-state spirits and wine distribution

systems); MBWWA BIO 13-14 (defending Michigan’s

treatment of out-of-state residents as part of its

distribution “structure”).

5. Respondents also seek to avoid the impact of

Granholm by asserting that Michigan’s explicit

discrimination against out-of-state residents does not

implicate the Commerce Clause at all. Respondents

base this claim on a sentence in Exxon Corp. v. Gov-

ernor of Maryland, 437 U.S. 117 (1978), in which the

Court stated that the Commerce Clause “protects the

interstate market, not particular interstate firms

from prohibitive or burdensome regulations.” Id. at

127-128. See MBWWA BIO 15.

This passage from Exxon — in which the Court

measured the incidental impact of regulations that

allowed many out-of-state companies to do business

in-state — was not and has never been used to justify

explicit discrimination against out-of-state entities.’

* The Michigan Court of Appeals never suggested that a

facially discriminatory statute is immune from Commerce

Clause scrutiny if it simply discriminates against out-of-state

service-providers, as opposed to out-of-state product. Rather, the

court first asked whether the statute was discriminatory and

only after concluding it was not (a pre-Granholm conclusion that

is the subject of our petition), did the Michigan court cite Exxon

for the proposition that any incidental effect on out-of-state

interests was of no constitutional moment. See Pet. App. 12.

See Exxon, 437 U.S. at 125 (first inquiring whether

Maryland’s statute discriminated against interstate

goods, local producers or refiners). See generally

Piazza’s Seafood World v. Odom, 448 F.3d 744, 750

(5th Cir. 2006) (Exxon involved a statute that did not

facially discriminate); National Paint & Coatings

Assoc. v. City of Chicago, 45 F.3d 1124, 1131 (7th Cir.

1995) (Exxon does not deal with claims of discrimina-

tory disparate treatment), cert. denied, 515 U.S. 1143

(1995). Rather, this Court has made clear that states

violate the Commerce Clause when they discriminate

against out-of-state service-providers. See C & A

Carbone Inc. v. Town of Clarkstown, 511 U.S. 383, 391

(1994) (“the article of commerce is not so much the

solid waste itself, but rather the service of processing

and disposing of it. With respect to this stream of

commerce, the flow control ordinance discriminates

*** ”). This case — like Granholm — deals with a

statute that explicitly creates a separate set of rules

for in-state versus out-of-state residents. As in Gran-

holm, it implicates core Commerce Clause concerns.

6. Finally, respondents seek to take refuge in this

Court’s line of Equal Protection cases holding that

grandfather clauses are allowed to recognize legitimate

reliance interests under a pre-existing regulatory sys-

tem. See MBWWA BIO 17-18; State’s BIO 15-16. Peti-

tioners take no issue with this rule, but it completely

ignores the point that any possible reliance interests

here’ are themselves the product of unconstitutional

discrimination against out-of-state residents.

Respondents’ argument is akin to the argument

that the State of Oklahoma made in defense of a

statute passed in 1910 requiring every voter to pass a

literacy test, but also creating a “grandfather clause”

exempting voters from this requirement if they were

eligible to vote as of 1866, or were the descendants of

someone eligible to vote as of 1866. See Guinn uv.

United States, 238 U.S. 347 (1915). The Court struck

down this statute because it froze in place a voting-

rights system that was itself unconstitutional. If this

Court, or the Michigan courts upon remand, conclude

that the residency requirement unconstitutionally

discriminates against out-of-state residents, no

“srandfather clause” doctrine can sanitize the injuries

that continue to be inflicted on petitioners as a result

of that unconstitutional requirement.

* * *

Petitioners here seek no more and no less than

the privileges Michigan affords in-state residents

(who were in-state residents as of 1996). All of the

claims about the problems posed by a single entity

acting as both an ADA and a wine wholesaler apply

equally to in-state and out-of-state residents. Michigan

* It should be noted that no in-state resident had a pre-1996

reliance interest in being able to act as both an ADA and a wine-

wholesaler. There was no such thing as an ADA prior to 1996, so no

in-state resident ever could have relied on acting in these dual roles.

has every right to impose an even-handed prohibition

on any company serving in both capacities. Michigan

also may choose to allow any company to serve both

roles. Michigan cannot, however, pass one set of rules

for in-state residents and another for out-of-state

residents. That is the resounding message of Gran-

holm, a message that the Michigan Court of Appeals

should be afforded an opportunity to consider.

CONCLUSION

For the foregoing reasons, as well as those set forth

in the petition for a writ of certiorari, the petition should

be granted, the decision of the Michigan Court of Ap-

peals should be vacated, and the case should be re-

manded to the Michigan Court of Appeals for

reconsideration in light of Granholm. In the alternative,

the Court should grant the petition for certiorari to

resolve the important issues this case presents.

Respectfully submitted,

Louis B. REINWASSER LAWRENCE C. MARSHALL