Appendix — Wine Country Gift Baskets.com v. Steen

APPENDIX CONTENTS

Original Fifth Circuit opinion,

Amended Fifth Circuit opinion,

July 22, 2010

(additions from original opinion marked by shading,

deletions marked by strikeout ... 0... eee eee 26a

Fifth Circuit order denying rehearing en banc,

Nee en en ccsescscacensevecerecscscnces ... 3a

District court opinion,

October cr. csemewebdcdoccdnceece 55a

la

FILED: January 26, 2010

Charles R. Fulbruge Ill, Clerk

IN THE UNITED STATES COURT OF

APPEALS FOR THE FIFTH CIRCUIT

No. 08-10146

WINE COUNTRY GIFT BASKETS.COM; K&L

WINE MERCHANTS; BEVERAGES & MORE INC;

DAVID L TAPP; RONALD L PARRISH; JEFFREY R

DAVIS

Plaintiffs - Appellants-Cross-Appellees

v.

JOHN T. STEEN, JR., Commissioner of the Texas

Alcoholic Beverage Commission; GAIL MADDEN,

Commissioner of the Texas Alcoholic Beverage

Commission; JOSE CUEVAS, JR., Commissioner of

the Texas Alcoholic Beverage Commission

Defendants-Appellees-Cross-Appellants

ALLEN STEEN, in his official capacity as

administrator of the Texas Alcoholic Beverage

Commission

Defendant — Appellee-Cross-Appellant

GLAZERS WHOLESALE DRUG COMPANY, INC;

REPUBLIC BEVERAGE COMPANY

Intervenor Defendants — Appellees-Cross-Appellants

Appeal from the United States District Court for the

Northern District of Texas

Before JOLLY, PRADO, and SOUTHWICK, Circuit

Judges.

9.

a4 ©

Leshie H. Southwick, Circuit Judge:

This case primarily concerns a Texas law that

allows alcohol retailers to ship to the door of their

local consumers. Out-of-Texas wine retailers claim

that the dormant Commerce Clause requires they be

given a supposedly reciprocal right to make direct

shipments to any Texas consumer. The district court

partly accepted their argument. We hold that the

statutes do not run afoul of the dormant Commerce

Clause. We VACATE and REMAND for entry of

judgment.

FACTUAL AND LEGAL BACKGROUND

There were several parties to this case, but they

can be grouped easily. One plaintiff, Siesta Village

Market LLC, who is a Florida wine retailer, has

dismissed its appeal. Another, Wine Country Gift

Baskets.com, is a California wine retailer. Wine

Country’s appellate brief describes the plaintiffs,

present and past, as “a group of out-of-state wine

retailers and Texas wine consumers.” We refer to

the plaintiffs collectively as “Wine Country.”

Suit was filed by Siesta Village and a few Texas

wine consumers on March 31, 2006, in the Dallas

Division of the U.S. District Court for the Northern

District of Texas. A nearly identical suit was filed by

Wine Country, two other California retailers, and a

few named Texas consumers in the Fort Worth

Division. The suits were consolidated in the Dallas

Division. The wine retailers located outside of Texas

wish to ship wine directly to Texas consumers.

Defendants are Allen Steen, the Administrator of

the Texas Alcoholic Beverage Commission, and three

Commission members’ sued in their _ official

3a

capacities. They enforce the Texas Alcoholic

Beverage Code (“FABC”). We will refer to the

various Defendants as “the State” or “Texas.”

Two Texas’ alcoholic beverage wholesalers

intervened. These companies are Glazer Wholesale

Drug Company, Inc., and Republic Beverage Co.

As do many other States, Texas has a three-tier

system for regulating sales of alcoholic beverages.

The first tier is the producer, who must sell its

product to the second-tier, which is a State-licensed

wholesaler. The wholesaler distributes the product

to the third tier, consisting of State-licensed

retailers. Consumers purchase from the retailers.

“[S]trict separation between the manufacturing,

wholesaling, and retailing levels” of the alcoholic

beverage industry must be maintained. TEX. ALCO.

BEV. CODE § 6.03(3).

The challenged Texas laws fali into’ three

principal categories. Almost all the relevant

provisions apply to alcohol generally, though the

complaint is from companies whose commercial

interest is solely in wine.

First, some laws allow individuals to bring

alcoholic beverages into Texas for their own use,

known as a “personal import exception,” but limit the

quantity. The district court held that this direct-

purchase restriction was unconstitutional in part.

“Texas cannot prohibit consumers from purchasing

wine from out-of-state retailers who comply with the

Code and TABC regulations,” the district court held.

Stesta Vill. Mkt. v. Perry, 530 F. Supp. 2d 848, 868

(N.D. Tex. 2008). It ordered Texas to allow out-of-

state retailers to receive Texas-issued_ retailer

permits. Therefore, any consumer who bought wine

4a

from an out-of-state holder of a Texas permit would

not be subject to the quantity limit when entering

the State with the beverages, though the limit for

importing would apply to the same person’s excessive

purchases from out-of-state retailers that did not

have Texas permits.

Second, and at the heart of this case, some of the

laws allow in-state retailers to deliver alcoholic

beverages to their customers within designated local

areas, but forbid out-of-state retailers from

delivering or shipping alcoholic beverages _ to

customers anywhere in Texas.! Retailers may use

common carriers licensed under the TABC, which

include such companies as Federal Express. Just

before summary judgment motions were filed in the

consolidated suits, the Texas legislature amended

the prior law which had allowed holders of package

store permits or wine-only package store permits to

ship their beverages statewide. TEX. ALCO. BEV.

CODE § 22.03 (Vernon 2006) (amended Sept. 1,

2007). The amendment drew in the boundaries of

the area of permissible shipment from the entire

State to basically the county in which the retailer

has a store. Id. §§ 22.03 & 24.03 (Vernon 2009). The

district court held that the statutes discriminated

against Wine Country and granted relief.

1 Although the statutes create some special permits for

retailers selling only wine, the statutes allowing local delivery

apply to retailers selling only wine and also to full-service

package store permit holders. TEX. ALCO. BEV. CODE §§

22.03(a); 24.03.

oa

Third, the suit challenged requirements that the

holders of TABC retailer permits have been Texas

citizens for one year. The decision in an earlier case

declared those provisions unconstitutional insofar as

they applied to wholesalers. S. Wine & Spirits of

Tex. v. Steen, 486 F. Supp. 2d 626, 633 (W.D. Tex.

2007). The district court in the present case declared

the requirements unconstitutional as applied to

retailers. The State does not appeal the voiding of

the requirement and advised the district court that it

will not enforce the citizenship rule.

The parties agreed on a preliminary injunction

blocking enforcement of certain provisions for the

duration of the lawsuit. On summary judgment, the

district court declared twenty-three TABC provisions

to be unconstitutional. Siesta Vill. Mkt., 530 F.

Supp. 2d at 873.

The district court did not, however, provide the

remedy Wine Country wanted. The court decided

that other provisions of the TABC, though clearly

regulating only in-state retailers, should be applhled

to out-of-state retailers. Thus, Wine Country had a

right to make direct shipments to Texas consumers,

but it was required to obtain a Texas retailer permit

and purchase all wine shipped to Texas consumers

from Texas-licensed wholesalers. Such a “victory”

was, if not pyrrhic, apparently of no benefit.”

2 The Second Circuit found it operationally absurd for out-

of-state retailers to purchase inventory’ from in-state

wholesalers, have it delivered to the retailers in some fashion,

then shipped back to in-state consumers. Arnold's Wines, Inc.

6a

Wine Country’s dissatisfaction is evident from the

fact it was the first to appeal, thereby becoming the

Appellant despite the general success of its

arguments. It claimed error in the remedy. The

State cross-appealed to argue that its statutes do not

violate the dormant Commerce Clause. Siesta

Village, the named plaintiff in one of the two

consolidated cases, initially was an Appellant but

has since dismissed its appeal.

DISCUSSION

The grant of a motion for summary judgment is

reviewed de novo. Pasant v. Jackson Nati Life Ins.

Co., 52 F.3d 94, 96 (5th Cir. 1995). Summary

judgment is appropriate when there is no genuine

issue of material fact and the moving party is

entitled to judgment as a matter of law. Fed. R. Civ.

P. 56(c)(2).

This appeal almost exclusively concerns questions

of law.

Wine Country convinced the district court that

numerous TABC provisions violated the dormant

Commerce Clause. Wine Country’s arguments as the

Appellant center on the remedy imposed by the

district court. Because we set aside the invalidation

of the statutory provisions, issues about the remedial

relief implementing the invalidation become moot.

We thus do not discuss Wine Country’s arguments on

the remedy.

v. Boyle, 571 F.3d 185, 192 n.3 (2d Cir. 2009). Wine Country

also found the requirement to be dispiriting.

7a

The State of Texas as Cross-Appellant does not

contest the district court’s invalidation of the

requirement that retailers establish Texas residency.

That part of the judgment was not included in any

notice of appeal and therefore has not been brought

to us for reversal or affirmance.

Texas vigorously does contest the holding that the

dormant Commerce Clause interfered with what

Texas considers to be a right granted by the Twenty-

first Amendment to favor in-state retailers in some

respects.

Texas also argues that the direct shipping laws

are justified by legitimate state interests. It alleges

valid local public interests exist and the law has only

incidental effects on interstate commerce. Its policy

justifications include the State’s need to access retail

sites for inspection and enforcement, which can

uncover illegal activities—specifically regarding

alcohol or more generally for money laundering—and

the State’s goals of promoting temperance, insuring

tax collections, and assuring the separation between

the three tiers. We do not reach the _ policy

justifications, as our reversal is for other reasons.

The last section in the Texas brief explains its

embrace of the remedy that Wine Country rejects.

There is no need to review those arguments.

We discuss only the cross-appeal arguments

presented by Texas. First, we will examine closely

the United States Supreme Court opinion that spoke

strongly and supportively about the three-tier

system for distribution of alcohol. We then look at

what three subsequent opinions from other courts

have said about it. We then briefly review the

8a

district court’s decision, and finally we apply our

analysis to it.

A. The three-tier system and Granholm

Intoxicating liquor is the only consumer product

identified in the Constitution. Only its regulation by

States is given explicit warrant.

The 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. The goals of

“promoting temperance, ensuring orderly market

conditions, and raising revenue” are met through

regulation of the production and distribution of

alcoholic beverages. North Dakota v. United States,

495 U.S. 423, 432 (1990) (plurality opinion). The

understanding of a State’s power under the Twenty-

first Amendment may have changed since the 1933

ratification, but we need not review seventy-five

years of history. Instead, we rely primarily on the

latest Supreme Court explanation.

The basic point Texas makes on appeal is that the

three-tier system allows certain kinds of distinctions

and particularly allows distinctions between in-state

and out-of-state retailers. Further, allowing Texas-

licensed retailers to make their sales in certain ways,

namely, by delivery, and prohibiting out-of-state

retailers from doing anything at all, is said to be

authorized by controlling interpretations of the

Twenty-first Amendment.

We start where Texas urges us to start, and

where the district court did, by examining the most

Ya

recent Supreme Court discussion of the interplay

between a State’s authority to regulate alcohol and

the dormant Commerce Clause. See Granholm v.

Heald, 544 U.S. 460 (2005). The Court reaffirmed

the principle that, despite what might appear to be

absolute authority granted to States by the Twenty-

first Amendment to regulate alcohol, the anti

discrimination principles of the dormant Commerce

Clause nonetheless place some restrictions on the

States.

The Court said that “in all but the narrowest

circumstances, state laws violate the Commerce

Clause if they mandate ‘differential treatment of in-

state and _ out-of-state economic interests’ that

benefits the former and burdens the latter.” Jd. at

472 (quoting Ore. Waste Sys., Inc. v. Dep't of Envtl.

Quality of Ore., 511 U.S. 93, 99 (1994)). “State laws

that discriminate against interstate commerce face ‘a

virtually per se rule of invalidity.” Jd. at 476

(quoting Philadelphia v. New Jersey, 437 U.S. 617,

624 (1978)).

The Granholm Court invalidated two States’

“direct shipping” laws allowing in-state wineries to

ship wine they produced directly to consumers, but

barring out-of-state wineries from doing the same. It

found the “discriminatory character” of Michigan’s

prohibition “obvious,” as that State’s laws prohibited

any shipment from out-of-state wineries, while

allowing in-state wineries to ship after obtaining a

permit. Jd. at 473. New York’s scheme was more

complicated, allowing out-of-state wineries to ship to

in-state consumers if the wineries established a

physical presence in the State and became part of

New York’s three-tier distribution system. The

10a

Court nonetheless found New York’s_ rules

discriminatory, noting that the rules clearly gave

“preferential terms” to in-state wineries, which

qualified for a simpler permit, did not have to

participate in the three-tier system, and could ship

wine directly from the site of its production. /d. at

474. Both States’ laws, then, dealt with producers.

At least as to producers, the Court held that the

“Amendment does not supersede other provisions of

the Constitution and, in particular, does not displace

the rule that States may not give a discriminatory

preference to their own producers.” Jd. at 486.

Once finding the laws discriminatory, the Court

examined whether they might be saved by a tenet of

the dormant Commerce Clause that exempts laws

that “advance[] a legitimate local purpose that

cannot be adequately served by reasona le

nondiscriminatory alternatives.” Jd. at 489 (que\ng

New Energy Co. of Ind. v. Limbach, 486 U.S. 269,

278 (1988)). Obtaining such an exemption requires

the “clearest showing” that the law is the only

adequate means of serving the State’s legitimate

purpose. Jd. at 490 (quoting C&A Carbone, Inc. v.

Clarkstown, 511 U.S. 383, 393 (1994)). The States

claimed two purposes—prevention of underage

drinking and the need for taxes. Jd. at 489. The

Court found that neither had sufficient evidentiary

support to save those States’ laws. Jd. at 490-92. We

do not discuss this point because we determine that

the Texas provisions are constitutional and do not

need to be saved.

A decision by this court foreshadowed Granholm.

In it, we struck down Texas Jaws that allowed Texas

wineries to ship directly to consumers and thus

lla

bypass going first to a wholesaler, but these laws

prohibited out-of-state wineries from doing the same.

Dickerson v. Bailey, 336 F.3d 388, 406-07 (5th Cir.

2003). The Texas legislature responded to Dickerson

by authorizing wineries wherever located to ship

directly to Texas consumers once they were issued

the appropriate permit. TEX. ALCO. BEV. CODE §§

54.01-.12.

We disagree with Wine Country that Dickerson

answers today’s questions. That precedent, as did

Granholm, concerned wineries, t.e., the producers of

the product traveling in commerce. The producers in

a three-tier system often are not located in the State

in which the sales occur. The traditional three-tier

system, seen as one that funnels the product,

Granholm, 544 U.S. at 489, has an opening at the top

available to all. The wholesalers and retailers,

though, are often required by a State’s law to be

within that State. The distinction is seen in Texas

law. It allows wineries themselves, located for

example in California or Florida as are the retailer

plaintiffs, to ship directly to Texas consumers.

Texas argues that the following language in

Granholm certifies the constitutionality of the three-

tier system that most States use, and is the lens

through which the concept of discrimination needs to

be seen:

The States argue that any decision

invalidating their direct-shipment laws

would call into question the

constitutionality of the three-tier system.

This does not follow from our holding.

“The Twenty-first Amendment grants the

States virtually complete control over

12a

whether to permit importation or sale of

liquor and how to structure the liquor

distribution system.” Cal. Retail Liquor

Dealers Assn. v. Midcal Aluminum, Inc.,

445 U.S. 97, 110 (1980). A State which

chooses to ban the sale and consumption of

alcoho] altogether could bar its

importation; and, as our history shows, it

would have to do so to make its laws

effective. States may also assume direct

control of liquor distribution through

state-run outlets or funnel sales through

the three-tier system. 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 Dakota to require that

all liquor sold for use in the State be

purchased from a_ licensed in-state

wholesaler’). State policies are protected

under the Twenty-first Amendment when

they treat liquor produced out of state the

same as its domestic equivalent. The

instant cases, i1n- contrast, involve

straightforward attempts to discriminate

in favor of local producers.

Id. at 488-89 (citations reformatted). That language

may be dicta. If so, it is compelling dicta. What we

make of that language, and its ability to protect

these Texas statutes from Wine Country’s dormant

Commerce Clause arguments, is the next part of our

analysis.

l3a

B. Other Courts’ Granholm analysis

Granholm dealt specifically with state laws

treating in-state and out-of-state producers of alcohol

differently. This present appeal involves retailers.

Since Granholm, other decisions from outside this

Circuit have addressed that precedent’s applicability

to retailers who wish to ship wine into other States.

We will discuss the three that are the most relevant."

In the earliest decision, some Virginia consumers

and a few out-of-state wineries challenged a Virginia

statute that limited the amount of alcohol that

consumers could personally carry into the State for

their own use. Brooks v. Vassar, 462 F.3d 341, 349

(4th Cir. 2006). The plaintiffs’ theory was that the

provision was unconstitutional because consumers

could purchase an unlimited amount of wine from in-

state sources but only limited amounts out-of-state

for their personal importation into Virginia.

The opinion for the court held that plaintiffs’

effort to compare in-state retailers to out-of-state

retailers and then allege they were’ treated

differently was fundamentally a challenge to the

three-tier system itself. Brooks, 462 F.3d at 352

(Niemeyer, J.).4 Because the Supreme Court had

3 A fourth decision analyzing Granholm was recently

released, but we find nothing in it to affect our reasoning.

Family Winemakers of Cal. v. Jenkins, No. 09-1169, 2010 WL

118387, at *5-15 (1st Cir. Jan. 14, 2010) (state law granting

distribution rights to “small” wineries was held to discriminate

in favor of in-state wineries, all of whom were “small’).

4 Judge Niemeyer wrote for the court, but a second judge

concurred only in the judgment with respect to this part of the

l4a

described the three-tier system as “unquestionably

legitimate,” the court held the Virginia statutes to be

constitutionally sound. Jd. (quoting Granholm, 511

U.S. at 489).

In another decision, there were challenges to New

York statutes that are analogous to those here. New

York law permitted an in-state alcoholic beverage

retailer to deliver directly to consumers’ residences

in New York, using the retailer’s vehicles or by using

vehicles of a transportation company licensed by the

State’s liquor authority; out-of-state retailers did not

have comparable rights. Arnold's Wines, Inc. v.

Boyle, 571 F.3d 185, 188 (2d Cir. 2009).

The Second Circuit started with a recognition

that the Twenty-first Amendment does not authorize

all alcohol regulation. Any discrimination between

in-state and_ out-of-state alcohol products’ or

producers must reasonably further a legitimate state

interest “that cannot adequately be served by

reasonable nondiscriminatory alternatives.” TJd. at

189 (citation cmitted). The court’s focus on “products

or producers” is the central debate: how much

further, if at all, beyond products and producers do

the anti-discrimination principles go?

The Second Circuit held products and producers

are the limit. It described plaintiffs’ arguments as

simplistic analogies to the Granholm-identified

discrimination. A State’s making distinctions among

in-state and out-of-state retailers, and even requiring

opinion, while the third judge on the panel dissented from that

part. This reasoning presumably has limited precedential effect

in that Circuit.

15a

wholesalers and retailers to be present in and

licensed by New York, were’ fundamental

components of the three-tier system authorized in

Granholm. Id. at 190.

The court concluded that the New York laws

permitting only in-state retailers to ship directly to

consumers were in “stark contrast” to the laws

struck down in Granholm, which “created specific

exceptions to the states’ three-tier systems favoring

in-state producers.” /d. at 191. It found that the

production-related discrimination involved — in

Granholm “was exactly the type of economic

protectionist policy the Commerce Clause sought to

forestall, and where the Granholm Court drew the

line.” TId.

The line drawn by the court was between the

broad state powers under the Twenty-first

Amendment “to regulate the transportation, sale,

and use of alcohol within ther borders,” and any

“attempts to discriminate in favor of local products

and producers.” /d. It held New York’s laws were

evenhanded in their control of “importation and

distribution of liquor within the state,” and that

made the dormant Commerce Clause all but

irrelevant. Jd. at 192.

In the third case, the court considered a Michigan

law authorizing some in-state retailers to ship wine

directly to consumers, while out-of-state retailers

without a physical presence in Michigan could not.

Siesta Vill. Mkt., LLC v. Granholm, 596 F. Supp. 2d

1035, 1037-38 (E.D. Mich. 2008). The Michigan court

limited the effect of the Supreme Court’s Granholm

decision: “While the [Granholm v.] Heald court did

state that the three-tier system was an appropriate

16a

use of state power, it did not approve of a system

that discriminates against out-of-state interests.” Jd.

at 1039. The court found that “regulations creat[ing]

an extra burden on out-of-state wine retailers” were

not saved by the Twenty-first Amendment. Jd. The

court also held it to be insufficient that out-of-state

retailers could comply with Michigan law by

establishing a location in the _ State. The

“prohibitive” expense of opening physical stores in

multiple States gave a clear advantage to in-state

retailers. Jd. at 1040 (citing Granholm, 544 U.S. at

474-75). Accordingly, the court struck down the

Michigan laws. ®

C. The District Court’s Interpretation

The district court here considered the Texas

“Personal Import Exception,” which authorizes

individuals to import alcohol for their own use. One

section prohibits importation unless authorized.

TEX. ALCO. BEV. CODE §107.05. That section is then

made inapplicable to Texas residents who import for

personal use not more than one quart of liquor, one

gallon of wine, or twenty-four twelve-ounce bottles of

beer. Jd. § 107.07. There is no direct limit on how

much can be purchased, only on how much can be

imported.

These provisions were held by the district court to

discriminate against out-of-state retailers because

they “prohibit customers from purchasing wine from

° An appeal to the Sixth Circuit was apparently mooted by

an intervening change in the Michigan statutes’ being

challenged.

17a

out-of-state retailers” in unlimited quantities. Siesta

Vill. Mkt., 530 F. Supp. 2d at 868. The remedy was

to allow out-of-state retailers to apply for Texas

retail permits, even without the retailers’ opening a

location in the State. Any retailer with a Texas

permit and making sales at locations outside of

Texas could not be limited in sales volumes when

those limits do not apply to Texas permit holders

making sales inside Texas.

The district court also held that the Texas local

shipping rights were discriminatory. The court held

the relevant question to be whether there was

discrimination “with respect to access to in-state

markets,” and there could be no exception for de

minimis jlevels of discrimination. Id. at 864

(emphasis in original). The disability imposed on

out-of-state retailers was not a “mere practical

consequence” of location, as it might be if Texas

permitted only over-the-counter sales of alcohol.

Since Texas allowed in-state retailers to ship alcohol,

there was no practical reason why out-of-state

retailers could not also. Jd. at 865-66. Shipping was

the key, because shipping was as easily done from

outside the State as from within.

Having found the Texas laws discriminatory, the

court turned to the question of whether the State

could show legitimate local purposes, not obtainable

by nondiscriminatory alternatives, to justify the

discrimination. We do not ultimately reach that

analysis, so we do not summarize it here.

D. Dormant Commerce Clause Analysis

We first analyze the provisions that allow an in-

state retailer to deliver within its county but bars an

out-of-state retailer from shipping into Texas. Texas

18a

argues that distinguishing between retailers in this

way is a fundamental part of the constitutional

three-tier system, which is~ “unquestionably

legitimate.” Granholm, 544 U.S. at 488-89.

To the contrary, Wine Country focuses on the

Granholm prohibition on a_ state’s lquor laws

discriminating against out-of-state interests. Wine

Country acknowledges that the Court limited its

holding to discrimination benefitting alcohol on the

basis of its in-state production status, but Wine

Country argues that makes sense as that was the

Granholm dispute. Texas argues the Granholm

failure to mention retailers was significant, as

distinctions favoring in-state retailers are inherently

part of the three-tier system.

We first note what is not in _ issue. The

discrimination that Granholm invalidated was a

State’s allowing its wineries to ship directly to

consumers but prohibiting out-of-state wineries from

doing so. ‘Texas grants in-state and out-of-state

wineries the same rights. TEX. ALCO. BEV. CODE §§

54.01-54.12.

Such discrimination—among producers—is not

the question today. When analyzing what else is

invalid under the Supreme Court's Granholm

reasoning, we find direction in a source for some of

the Court’s language. The Court quoted a 1986

precedent that “a comprehensive system for the

distribution of liquor within [North Dakota’s]

borders” was “unquestionably legitimate.”

Granholm, 544 U.S. at 489 (quoting North Dakota v.

United States, 495 U.S. 423, 432 (1986)). North

Dakota employed a three-tier system similar to that

in Texas, in which producers sell to state-licensed

19a

wholesalers, who sell to state-licensed retailers.

North Dakota, 495 U.S. at 428. ‘That sort of system

has been given constitutional approval. The

discrimination that would be questionable, then, is

that which is not inherent in the three-tier system

itself. If Graxholm’s legitimizing of the tiers is to

have meaning, it must at least mean that. The

legitimizing is thus a caveat to the statement that

the Commerce Clause is violated if state law

authorizes “differential treatment of in-state and

out-of-state economic interests that benefits the

former and burdens the latter.” Granholm, 544 U.S.

at 472 (internal quotation marks and citation

omitted).

Therefore, the foundation on which we build is

that Texas may have a three-tier system. That

system authorizes retailers with locations within the

State to acquire Texas permits if they meet certain

eligibility requirements. Those retailers must

purchase their alcoholic beverages from Texas-

licensed wholesalers, who in turn purchase from

producers. Each tier is authorized by Texas law and

approved by the Twenty-first Amendment—so says

Granholm—to do what producers, wholesalers, and

retailers do.§

6 Wine Country at oral argument emphasized a provision of

Texas law allowing Texas retailers to receive direct shipments

from Texas wineries, bypassing the wholesaler tier. See TEX.

ALCO. BEV. CODE § 110.053. This provision is not on the list of

those enjoined by the district court and is not a subject of this

appeal. Siesta Vill Mkt., 530 F. Supp. 2d at 851.

20a

Wine Country argues that the three tiers have

tumbled because Texas has permitted retailers to

make home deliveries within a confined range. At

least in part, this must be an argument that Texas

retailers are being allowed to act in ways that are

unacceptable for retailers in a constitutionally sound

system. The defect is one of discrimination: Texas

retailers are doing what a retailer in California or

Florida physically and practically can do, which is to

use a licensed shipper to deliver to a Texas

consumer, but legally cannot do.

To address the argument, it would be useful to

know what specific actions allegedly caused the

retailers to stop being Granholm-approved,

traditional third-tier retailers. If Texas allowed a

retailer to carry the beverages to a customer’s vehicle

parked in its lot, or across the street, would that be a

problem? Ifa retailer’s own delivery trucks traveled

to the customer, is that discrimination? Does

discrimination not begin until a retailer uses a

licensed shipper? Relevant to the answer, Texas has

not defended on the basis that retailers are just

permitted to serve their usual local markets in

enhanced, customer-friendly ways. Indeed, at oral

argument, the Texas Solicitor General said that the

geographical limits to local deliveries were

irrelevant. The prior state-wide delivery version of

the provision would be constitutional under that

argument. We need not and do not reach the broader

definitional issue.

In analyzing “retailing” for Twenty-first

Amendment purposes, we find a useful warning in

concurring Judge Calabresi’s observations in

Arnold’s Wines. He found a tension between the

Zila

original (likely) meaning of the Twenty-first

Amendment and the current interpretation, a change

largely the result of Supreme Court reaction to the

changing economic and _ social world since the

adoption of the Amendment. Arnold’s Wines, 571

F.3d at 198-201 (Calabresi, J., concurring). He also

concluded that uncertainty existed about’ the

direction the Supreme Court will take with its

developing interpretation of the Amendment. Yet he

agreed that the majority applied the best

understanding of its current meaning. The best

understanding is also what we seek.

We pull back from any effort to define the reach of

a traditional three-tier retailer. Instead, we resolve

whether what Texas has allowed here is_ so

substantially different from what retailing must

include as not to be third-tier retailing at all.

Because of Granholm and its approval of three-tier

systems, we know that Texas may authorize its in-

state, permit-holding retailers to make sales and

may prohibit out-of-state retailers from doing the

same. Such an authorization therefore is not

discrimination in Granholm terms. The rights of

retailers at a minimum would include making over-

the-counter sales. Wine Country’s argument implies

that is where Granholm-approved retailing ends and

where the potential for discrimination begins. We

disagree. Texas has adjusted its controls over

retailers by allowing alcoholic beverage sales to

customers other than those who walk into a store.

Still, sales are being made to proximate consumers,

not those distant to the store. Retailers are acting as

retailers and making what conceptually are local

deliveries.

22a

Our read of Granholm is that the Twenty-first

Amendment still gives each State quite broad

discretion to regulate alcoholic beverages. The

dormant Commerce Clause applies, but it applies

differently than it does to products whose regulation

is not authorized by a _ specific constitutional

amendment. Regulating alcoholic beverage retailing

is largely a State’s prerogative.

Granholm prohibited discrimination against out-

of-state products or producers. Texas has not tripped

over that bar by allowing in-state retailer deliveries.

Yet it also has not discriminated among retailers.

Wine Country is not similarly situated to Texas

retailers and cannot make a logical argument of

discrimination. The illogic is shown by the fact that

the remedy being sought in this case—allowing out-

of-state retailers to ship anywhere in Texas because

local retailers can deliver within their counties—

would grant out-of-state retailers dramatically

greater rights than Texas ones.

Wine Country argues that Texas has created the

need for that outsized remedy through its

discrimination, and ‘Texas can_ eliminate loca!

unfairness by broadening the rights granted its own

retailers. The problem with the argument is that it

ignores the Twenty-first Amendment. When

analyzing whether a State’s alcoholic beverage

regulation discriminates under the dormant

Commerce Clause, a beginning premise is_ that

wholesalers and retailers may be required to be

within the State. Starting at that point, we see no

discrimination in the Texas law.

We view local deliveries as a constitutionally

benign incident of an acceptable three-tier system.

23a

That view is consistent with the unquestioning

reference by the Supreme Court in Granholm to a

Michigan statute that authorized retailers to make

home deliveries under certain conditions. Granholm,

544 U.S. at 469.7 A State’s granting this authority to

retailers is neither recent nor unique. Texas has

permitted direct delivery and carrier shipment by in-

state retailers at least since 1977. TEX. ALCO. BEV.

CODE § 22.03 (Vernon 2006, adopted Sept. 1, 1977).

Some other States also allow delivery by in-state

retailers.2 A State’s right to authorize a variety of

retail practices for alcoholic beverages free of

dormant Commerce Clause barriers may not be

limitless. Yet it seems to us that implementing

consumer-friendly practices for in-state retailing of

these products often has more to do with changing

economic realities than with the Constitution.

We hold that the limited rights Texas has given

its state-licensed retailers to make deliveries do not

transgress the dormant Commerce Clause.

’ Michigan has subsequently repealed this provision and

banned all direct shipment by retailers, perhaps in response to

the ruling of the district court in Siesta Vill. Mkt., 596 F. Supp.

2d 1035. See MICH. COMP. LAWS ANN. § 436.1203(2) (amend. eff.

March 31, 2009).

8 See, e.g., COLO. REV. STAT. ANN. § 12-47-407(3) & § 408(3);

FLA. STAT. ANN.§ 561.57(1); 235 ILL. COMP. STAT. ANN. § 5/5-

1(d); IND. CODE ANN. § 7.1-3-9-9; IOWA ADMIN. CODE r. 185

17.141); ME. REV. STAT. ANN. tit. 28-A, § 2077(2) & (3); MD.

CODE ANN. art. 2B, § 2-301(b)(1); MASS. GEN. LAWS ANN. ch.

138, § 22; MINN. R. 7515.0580; N.J. ADMIN. CODE § 13:2-20.3;

N.Y. COMP. CODES R. & REGS. tit. 9, § 67.1; 02-040-016 R.I.

CODE R. § 4(10).

We now turn briefly to the separate provisions

regarding personal importing. As mentioned before,

Texas has placed a limit on the quantity of alcoholic

beverages that an individual can purchase out-of.

state and then bring into Texas. TEX. ALCO. BEV.

CODE §§ 107.05(a) & 107.07(a). Preliminarily, it

should not be overlooked that Texas did not, indeed

can not, limit the number of alcoholic beverages

consumers may buy at an out-of-state retailer. Any

purchase limits would have to come from the other

State’s laws. The barrier Texas imposes is at its

border.

We conclude that the incidental effect on foreign

retail sales resulting from limits on quantities to be

brought into Texas is at worst an _ acceptable

balancing. ‘The interests of Texas consumers in

purchasing alcoholic beverages outside of Texas are

recognized, but the State validly insists that the vast

majority of the alcoholic beverages consumed in

Texas be obtained through its own retailers. In

effect, Texas has granted a limited exception to the

three-tier system. We find no constitutional defect.

See Brooks, 462 F.3d at 353-54 (similar provision in

Virginia law upheld against dormant Commerce

Clause challenged).

CONCLUSION

We reverse the district court’s holding that the

personal import exception authorized by Texas

Alcoholic Beverage Code sections 107.05(a) and

107.07(a), has any defect under the dormant

Commerce Clause.

We also reserve the district court’s invalidation of

provisions that only retailers with a_ physical

presence within the State could deliver to consumers

a

40a

in the State. The provisions as listed by the district

court are Texas Alcoholic Beverage Code sections

6.01, 11.01, 22.01, 22.03, 24.01, 24.03, 37.01, 37.03,

41.01, 43.04, 54.12, and 107.07(f).

Consequently, in those respects the district

court’s judgment is VACATED. We REMAND for

entry of judgment consistent with this opinion.

FILED: July 22, 2010

Lyle W. Cayce, Clerk

IN THE UNITED STATES COURT OF

APPEALS FOR THE FIFTH CIRCUIT

No. 08-10146

WINE COUNTRY GIFT BASKETS.COM; K&L

WINE MERCHANTS; BEVERAGES & MORE INC;

DAVID L TAPP; RONALD L PARRISH; JEFFREY R

DAVIS

Plaintiffs — Appellants-Cross-Appellees

Vv.

JOHN T. STEEN, JR., Commissioner of the Texas

Alcoholic Beverage Commission; GAIL MADDEN,

Commissioner of the Texas Alcoholic Beverage

Commission; JOSE CUEVAS, JR., Commissioner of

the Texas Alcoholic Beverage Commission

Defendants-Appellees-Cross-Appellants

ALLEN STEEN, in his official capacity as

administrator of the Texas Alcoholic Beverage

Commission

Defendant — Appellee-Cross-Appellant

GLAZERS WHOLESALE DRUG COMPANY, INC;

REPUBLIC BEVERAGE COMPANY

Intervenor Defendants — Appellees-Cross-Appellants

Appeals from the United States District Court for the

Northern District of Texas, Dallas

ON PETITION FOR REHEARIN

27a

Before JOLLY, PRADO, and SOUTHWICK,

Circuit Judges.

Leslie H. Southwick, Circuit Judge:

Revition foe Bin Reuae Review is

DENIED, Wo witty die jaswe peel opimonl

issued ©a Janwany 23, AIO, cial culosetouiea the

foulSwin'e,..

This case primarily concerns a Texas law that

allows alcohol retailers to ship to the door of their

local consumers. Out-of-Texas wine retailers claim

that the dormant Commerce Clause requires they be

given a supposedly reciprocal right to make direct

shipments to any Texas consumer. The district court

partly accepted their argument. We hold that the

statutes do not run afoul of the dormant Commerce

Clause. We VACATE and REMAND for entry of

judgment.

FACTUAL AND LEGAL BACKGROUND

There were several parties to this case, but they

can be grouped easily. One plaintiff, Siesta Village

Market LLC, who is a Florida wine retailer, has

dismissed its appeal. Another, Wine Country Gift

Baskets.com, is a California wine retailer. Wine

Country’s appellate brief describes the plaintiffs,

present and past, as “a group of out-of-state wine

retailers and Texas wine consumers. We refer to

the plaintiffs collectively as “Wine Country ”

Suit was filed by Siesta Village and a few Texas

wine consumers on March 31, 2006, in the Dallas

Division of the U.S. District Court for the Northern

District of Texas. A nearly identical suit wis filed by

Wine Country, two other California retatiers, and a

28a

few named Texas consumers in the Fort Worth

Division. The suits were consolidated in the Dallas

Division. The wine retailers located outside of Texas

wish to ship wine directly to Texas consumers.

Defendants are AHen Aan Steen, the

Administrator of the Texas Alcoholic Beverage

Commission, and three Commission members sued

in their official capacities. They enforce the Texas

Alcoholic Beverage Code (““TABC”). We will refer to

the various Defendants as “the State” or “Texas.”

a) °

Two Texas. alcoholic beverage wholesalers

intervened. These companies are Glazer Wholesale

Drug Company, Inc., and Republic Beverage Co.

As do many other States, Texas has a three-tier

system for regulating sales of alcoholic beverages.

The first tier is the producer, who must sell its

product to the second tier, which is a State-licensed

wholesaler. The wholesaler distributes the product

to the third tier, consisting of State-licensed

retailers. Consumers purchase from the retailers.

“[S]trict separation between the manufacturing,

wholesaling, and retailing levels” of the alcoholic

beverage industry must be maintained. TEX. ALCO.

BEV. CODE § 6.03(;).

The challenged Texas laws fall into three

principal categories. Almost all the relevant

provisions apply to alcohol generally, though the

complaint is from companies whose commercial

interest is solely in wine.

First, some laws allow individuals to bring

alcoholic beverages into Texas for their own use,

known as a “personal import exception,” but limit the

quantity. The district court held that this direct-

29a

purchase restriction was unconstitutional in part.

“Texas cannot prohibit consumers from purchasing

wine from out-of-state retailers who comply with the

Code and TABC regulations,” the district court held.

Siesta Vill. Mkt. Qa v. Perry, 530 F. Supp. 2d 848,

868 (N.D. Tex. 2008). It ordered Texas to allow out-

of-state retailers to receive Texas-issued retailer

permits. Therefore, any consumer who bought wine

from an out-of-state holder of a Texas permit would

not be subject to the quantity limit when entering

the State with the beverages, though the limit for

importing would apply to the same person’s excessive

purchases from out-of-state retailers that did not

have Texas permits.

Second, and at the heart of this case, some of the

laws allow in-state retailers to deliver alcoholic

beverages to their customers within designated local

areas, but forbid out-of-state retailers from

delivering or shipping alcoholic beverages’ to

customers anywhere in Texas.' Retailers may use

common carriers licensed under the TABC, which

include such companies as Federal Express Healox.

Just before summary judgment motions were filed in

the consolidated suits, the Texas legislature

amended the prior law which had allowed holders of

package store permits or wine-only package store

permits to ship their beverages statewide. TEX.

1 Although the statutes create some special permits for

retailers selling only wine, the statutes allowing local delivery

apply to retailers selling only wine and also to full-service

package store permit holders. TEX. ALCO. BEV. CODE §8§

22.03(a), 24.03.

30a

ALCO. BEV. CODE § 22.03 (Vernon 2006) (amended

Sept. 1, 2007). The amendment drew in the

boundaries of the area of permissible shipment from

the entire State to basically the county in which the

retailer has a store. Jd. §§ 22.03 & 24.03 (Vernon

2009). The district court held that the statutes

discriminated against Wine Country and granted

relief.

Third, the suit challenged requirements that the

holders of TABC retailer permits have been Texas

citizens for one year. The decision in an earlier case

declared those provisions unconstitutional insofar as

they applied to wholesalers. S. Wine & Spirits of

Tox v. Steen, 486 F. Supp. 2d 626, 633 (W.D.

Tex. 2007). The district court in the present case

declared the requirements unconstitutional as

applied to retailers. The State does not appeal the

voiding of the requirement and advised the district

court that it will not enforce the citizenship rule.

The parties agreed on a preliminary injunction

blocking enforcement of certain provisions for the

duration of the lawsuit. On summary judgment, the

district court declared twenty-three TABC provisions

to be unconstitutional. Siesta Vill. Mkt., 530 F.

Supp. 2d at 873.

The district court did not, however, provide the

remedy Wine Country wanted. The court decided

that other provisions of the TABC, though clearly

regulating only in-state retailers, should be applied

to out-of-state retailers. Thus, Wine Country had a

right to make direct shipments to Texas consumers,

but it was required to obtain a Texas retailer permit

and purchase all wine shipped to Texas consumers

sla

from Texas-licensed wholesalers. Such a “victory”

was, if not pyrrhic, apparently of no benefit.”

Wine Country’s dissatisfaction is evident from the

fact it was the first to appeal, thereby becoming the

Appellant despite the general success of its

arguments. It claimed error in the remedy. The

State cross-appealed to argue that its statutes do not

violate the dormant Commerce Clause. Siesta

Village, the named plaintiff in one of the two

consolidated cases, initially was an Appellant but

has since dismissed its appeal.

DISCUSSION

The grant of a motion for summary judgment is

reviewed de novo. Pasant v. Jackson Nat'l Life Ins.

Co., 52 F.3d 94, 96 (5th Cir. 1995). Summary

judgment is appropriate when there is no genuine

issue of material fact and the moving party is

entitled to judgment as a matter of law. Fed. R. Civ.

P. 56(c)(2).

This appeal almost exclusively concerns questions

of law. |

Wine Country convinced the district court that

numerous TABC provisions violated the dormant

Commerce Clause. Wine Country’s arguments as the

Appellant center on the remedy imposed by the

2 The Second Circuit found it operationally absurd for out-

of-state retailers to purchase inventory from in-state

wholesalers, have it delivered to the retailers in some fashion,

then shipped back to in-state consumers. Arnold's Wines, Inc.

v. Boyle, 571 F.3d 185, 192 n.3 (2d Cir. 2009). Wine Country

also found the requirement to be dispiriting.

32a

district court. Because we set aside the invalidation

of the statutory provisions, issues about the remedial

relief implementing the invalidation become moot.

We thus do not discuss Wine Country’s arguments on

the remedy.

The State of Texas as Cross-Appellant does not

contest the district court’s invalidation of the

requirement that retailers establish Texas resideney

oe That part of the judgment was not

included in any notice of appeal and therefore has

not been brought to us for reversal or affirmance.

Texas vigorously does contest the holding that the

dormant Commerce Clause interfered with what

Texas considers to be a right granted by the Twenty-

first Amendment to favor in-state retailers in some

respects.

Texas also argues that the direct shipping laws

are justified by legitimate state interests. It alleges

valid local public interests exist and the law has only

incidental effects on interstate commerce. Its policy

justifications include the State’s need to access retail

sites for inspection and enforcement, which can

uncover illegal activities—specifically regarding

alcohol or more generally for money laundering—and

the State’s goals of promoting temperance, insuring

tax collections, and assuring the separation between

the three tiers. We do not reach the _ policy

justifications, as our reversal is for other reasons.

The last section in the Texas brief explains its

embrace of the remedy that Wine Country rejects.

There is no need to review those arguments.

We discuss only the cross-appeal arguments

presented by Texas. First, we will examine closely

33a

the United States Supreme Court opinion that spoke

strongly and supportively about the three-tier

system for distribution of alcohol. We then look at

what three subsequent opinions from other courts

have said about it. We then briefly review the

district court’s decision, and finally we apply our

analysis to it.

A. The tkree-tier_system (Three-Tier System and

Granholm

Intoxicating liquor is the only consumer product

identified in the Constitution. Only its regulation by

States is given explicit warrant.

The transportation or importation | into any

state territery 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. The goals of

“promoting temperance, ensuring orderly market

conditions, and raising revenue” are met through

regulation of the production and distribution of

alcoholic beverages. North Dakota v. United States,

495 U.S. 423, 4382 (1990) (plurality opinion). The

understanding of a State’s power under the Twenty-

first Amendment may have changed since the 1933

ratification, but we need not review seventy-five

years of history. Instead, we rely primarily on the

latest Supreme Court explanation.

The basic point Texas makes on appeal is that the

three-tier system allows certain kinds of distinctions

and particularly allows distinctions between in-state

and out-of-state retailers. Further, allowing Texas-

34a

licensed retailers to make their sales in certain ways,

namely, by delivery, and prohibiting out-of-state

retailers from doing anything at all, is said to be

authorized by controlling interpretations of the

Twenty-first Amendment.

We start where Texas urges us to start, and

where the district court did, by examining the most

recent Supreme Court discussion of the interplay

between a State’s authority to regulate alcohol and

the dormant Commerce Clause. See Granholm ov.

Heald, 544 U.S. 460 (2005). The Court reaffirmed

the principle that, despite what might appear to be

absolute authority granted to States by the Twenty-

first Amendment to regulate alcohol, the anti-

discrimination principles of the dormant Commerce

Clause nonetheless place some restrictions on the

States.

The Court said that “in all but the narrowest

circumstances, state laws violate the Commerce

Clause if they mandate ‘differential treatment of in-

state and _ out-of-state economic interests’ that

benefits the former and burdens the latter.” Jd. at

472 (quoting Ore. Waste Sys., Inc. v. Dep't of Enutl.

Quality of Ore., 511 U.S. 93, 99 (1994)). “State laws

that discriminate against interstate commerce face ‘a

virtually per se rule of invalidity.” Jd. at 476

(quoting Philadelphia v. New Jersey, 437 U.S. 617,

624 (1978)).

- The Granholm Court invalidated two States’

“direct shipping” laws allowing in-state wineries to

ship wine they produced directly to consumers, but

barring out-of-state wineries from doing the same. It

found the “discriminatory character” of Michigan’s

prohibition “obvious,” as that State’s laws prohibited

90a

any shipment from out-of-state wineries, while

allowing in-state wineries to ship after obtaining a

permit. Jd. at 473. New York’s scheme was more

complicated, allowing out-of-state wineries to ship to

in-state consumers if the wineries established a

physical presence in the State and became part of

New York’s three-tier distribution system. The

Court nonetheless found New York’s_ rules

discriminatory, noting that the rules clearly gave

“preferential terms” to in-state wineries, which

qualified for a simpler permit, did not have to

participate in the three-tier system, and could ship

wine directly from the site of its production. /d. at

474. Both States’ laws, then, dealt with producers.

At least as to producers, the Court held that the

“Amendment does not supersede other provisions of

the Constitution and, in particular, does not displace

the rule that States may not give a discriminatory

preference to their own producers.” Jd. at 486.

Once finding the laws discriminatory, the Court

examined whether they might be saved by a tenet of

the dormant Commerce Clause that exempts laws

that “advance[] a legitimate local purpose that

cannot be adequately served by reasonable

nondiscriminatory alternatives.” Jd. at 489 (quoting

New Energy Co. of Ind. v. Limbach, 486 U.S. 269,

278 (1988)). Obtaining such an exemption requires

the “clearest showing” that the law is the only

adequate means of serving the State’s legitimate

purpose. /d. at 490 (quoting C&A Carbone, Inc. v.

Clarkstown, 511 U.S. 383, 393 (1994)). The States

claimed two purposes—prevention of underage

drinking and the need for taxes. Jd. at 489. The

Court found that neither had sufficient evidentiary

36a

support to save those States’ laws. Jd. at 490-92. We

do not discuss this point because we determine that

the Texas provisions are constitutional and do not

need to be saved.

A decision by this court foreshadowed Granholm.

In it, we struck down Texas laws that allowed Texas

wineries to ship directly to consumers and thus

bypass going first to a wholesaler, but these laws

prohibited out-of-state wineries from doing the same.

Dickerson v. Bailey, 336 F.3d 388, 406-07 (5th Cir.

2003). The Texas legislature responded to Dickerson

by authorizing wineries wherever located to ship

directly to Texas consumers once they were issued

the appropriate permit. TEX. ALCO. BEV. CODE §§

54.01-.12.

We disagree with Wine Country that Dickerson

answers today’s questions. That precedent, as did

Granholm, concerned wineries, l.e., the producers of

the product traveling in commerce. The producers in

a three-tier system often are not located in the State

in which the sales occur. The traditional three-tier

system, seen as one that funnels the product,

Granholm, 544 U.S. at 489, has an opening at the top

avallable to all. The wholesalers and retailers,

though, are often required by a State’s law to be

within that State. The distinction is seen in Texas

law. It allows wineries themselves, located for

example in California or Florida as are the retailer

plaintiffs, to ship directly to Texas consumers.

Texas argues that the following language in

Granholm certifies the constitutionality of the three-

tier system that most States use, and is the lens

through which the concept of discrimination needs to

be seen:

The States argue that any decision

invalidating their direct-shipment laws

would call into question the

constitutionality of the three-tier system.

This does not follow from our holding.

“The Twenty-first Amendment grants the

States virtually complete control over

whether to permit importation or sale of

liquor and how to structure the liquor

distribution system.” Cal. Retail Liquor

Dealers Assn. v. Midcal Aluminum, Inc.,

445 U.S. 97, 110 (1980). A State which

chooses to ban the sale and consumption of

alcoho] altogether could bar its

importation; and, as our history shows, it

would have to do so to make its laws

effective. States may also assume direct

control of liquor distribution through

state-run outlets or funnel sales through

the three-tier system. 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 Dakota to require that

all liquor sold for use in the State be

purchased from a_ licensed in-state

wholesaler’). State policies are protected

under the Twenty-first Amendment when

they treat liquor produced out of state the

same as its domestic equivalent. The

instant cases, in contrast, involve

straightforward attempts to discriminate

in favor of local producers.

48a

Id. at 488-89 (citations reformatted). That language

may be dicta. If so, it is compelling dicta. What we

make of that language, and its ability to protect

these Texas statutes from Wine Country’s dormant

Commerce Clause arguments, is the next part of our

analysis.

B. Other Courts’ Granholm enelysis Alaiye

Granholm dealt specifically with state laws

treating in-state and out-of-state producers of alcohol

differently. This present appeal involves retailers.

Since Granholm, other decisions from outside this

Circuit have addressed that precedent’s applicability

to retailers who wish to ship wine into other States.

We will discuss the three that are the most relevant.’

In the earliest decision, some Virginia consumers

and a few out-of-state wineries challenged a Virginia

statute that limited the amount of alcohol that

consumers could personally carry into the State for

their own use. Brooks v. Vassar, 462 F.3d 341, 349

(4th Cir. 2006). The plaintiffs’ theory was that the

provision was unconstitutional because consumers

could purchase an unlimited amount of wine from in-

state sources but only limited amounts out-of-state

for their personal importation into Virginia.

3 A fourth decision analyzing Granholm was_ recently

released, but we find nothing in it to affect our reasoning.

Family Winemakers of Cal. v. Jenkins, Ne-084+469-204+0-W4.

418387-0t*5-1)-Ust-GirJan-14-2010) S92ERI3 dR OS ;

Cire, BOLO) (state law granting distribution rights to “small”

wineries was held to discriminate infavor of in-state wineries,

all of whom were “smal]”).

39a

The opinion for the court held that plaintiffs’

effort to compare in-state retailers to out-of-state

retailers and then allege they were treated

differently was fundamentally a challenge to the

three-tier system itself. Brooks, 462 F.3d at 352

(Niemeyer, J.).4. Because the Supreme Court had

described the three-tier system as “unquestionably

legitimate,” the court held the Virginia statutes to be

constitutionally sound. Jd. (quoting Granholm, 511

U.S. at 489).

In another decision, there were challenges to New

York statutes that are analogous to those here. New

York law permitted an in-state alcoholic beverage

retailer to deliver directly to consumers’ residences

in New York, using the retailer’s vehicles or by using

vehicles of a transportation company licensed by the

State’s hquor authority; out-of-state retailers did not

have comparable rights. Arnold’s Wines, Inc. v.

Boyle, 571 F.3d 185, 188 (2d Cir. 2009).

The Second Circuit started with a recognition

that the Twenty-first Amendment does not authorize

all alcohol regulation. Any discrimination between

in-state and _ out-of-state alcohol products’ or

producers must reasonably further a legitimate state

interest “that cannot adequately be served by

reasonable nondiscriminatory alternatives.” TJId. at

189 (citation omitted). The court’s focus on “products

4 Judge Niemeyer wrote for the court, but a second judge

concurred only in the judgment with respect to this part of the

opinion, while the third judge on the panel dissented from that

part. This reasoning presumably has limited precedential effect

in that Circuit.

40a

or producers” is the central debate: how much

further, if at all, beyond products and producers do

the anti-discrimination principles go?

The Second Circuit held products and producers

are the limit. It described plaintiffs’ arguments as

simplistic analogies to the Granholm-identified

discrimination. A State’s making distinctions among

in-state and out-of-state retailers, and even requiring

wholesalers and retailers to be present in and

licensed by New York, were fundamental

components of the three-tier system authorized in

Granholm. Id. at 190.

The court concluded that the New York laws

permitting only in-state retailers to ship directly to

consumers were in “stark contrast” to the laws

struck down in Granholm, which “created specific

exceptions to the states’ three-tier systems favoring

in-state producers.” Jd. at 191. It found that the

production-related discrimination involved in

Granholm “was exactly the type of economic

protectionist policy the Commerce Clause sought to

forestall, and where the Granholm Court drew the

line.” Jd.

The line drawn by the court was between the

broad state powers under the Twenty-first

Amendment “to regulate the transportation, sale,

and use of alcohol within their borders,” and any

“attempts to discriminate in favor of local products

and producers.” Jd. It held New York’s laws were

evenhanded in their control of “importation and

distribution of liquor within the state,” and that

made the dormant Commerce Clause all but

irrelevant. Id. at 192.

4la

In the third case, the court considered a Michigan

law authorizing some in-state retailers to ship wine

directly to consumers, while out-of-state retailers

without a physical presence in Michigan could not.

Siesta Vill. Mkt., LLC v. Granholm, 596 F, a 2d

1035, 1037-38 (E.D. Mich. i

poo) wowniae Gs mook, Orcle:

auily 17, AOOOD.© ‘Naa When eam EouRE limited the effect

of the Supreme Court’s Granholm decision: “While

the [Granholm v.] Heald court did state that the

three-tier system was an appropriate use of state

power, it did not approve of a system that

discriminates against out-of-state interests.” Jd. at

1039. The court found that “regulations creat[ing]

an extra burden on out-of-state wine retailers” were

not saved by the Twenty-first Amendment. Jd. The

court also held it to be insufficient that out-of-state

retailers could comply with Michigan law by

establishing a location in the State. The

“prohibitive” expense of opening physical stores in

multiple States gave a clear advantage to in-state

retailers. Jd. at 1040 (citing Granholm, 544 U.S. at

474-75). Accordingly, the court struck down the

Michigan laws.

C. The District Court’s Interpretation

The district court here considered the Texas

“Personal Import Exception,” which authorizes

individuals to import alcohol for their own use. One

section prohibits importation unless authorized.

5 An appeal to the Sixth Circuit was apparently mooted by

an intervening change in the Michigan statutes being

challenged.

42a

TEX. ALCO. BEV. CODE §107.05. That section is then

made inapplicable to Texas residents who import for

personal use not more than one quart of liquor, ene

gator threezgallons of wine, or twenty-four twelve-

ounce bottles of beer. Jd. § 107.07. There is no direct

limit on how much can be purchased, only on how

much can be imported.

These provisions were held by the district court to

discriminate against out-of-state retailers because

they “prohibit eustemers Eonsumers from purchasing

wine from out-of-state retailers” in unlimited

quantities. Siesta Vill. Mkt., 530 F. Supp. 2d at 868.

The remedy was to allow out-of-state retailers to

apply for Texas retail permits, even without the

retailers’ opening a location in the State. Any

retailer with a Texas permit and making sales at

locations outside of Texas could not be limited in

sales volumes when those limits do not apply to

Texas permit holders making sales inside Texas.

The district court also held that the Texas local

shipping rights were discriminatory. The court held

the relevant question to be whether there was

discrimination “with respect to access to in-state

markets,” and there could be no exception for de

minimis levels of discrimination. Id. at 864

(emphasis in original). The disability imposed on

out-of-state retailers was not a “mere practical

consequence” of location, as it might be if Texas

permitted only over-the-counter sales of alcohol.

Since Texas allowed in-state retailers to ship alcohol,

there was no practical reason why out-of-state

retailers could not also. /d. at 865-66. Shipping was

the key, because shipping was as easily done from

outside the State as from within.

43a

Having found the Texas laws discriminatory, the

court turned to the question of whether the State

could show legitimate local purposes, not obtainable

by nondiscriminatory alternatives, to justify the

discrimination. We do not ultimately reach that

analysis, so we do not summarize it here.

D. Dormant Commerce Clause Analysts

We first analyze the provisions that allow an in-

state retailer to deliver within its county but bars an

out-of-state :etailer from shipping into Texas. Texas

argues that distinguishing between retailers in this

way is a fundamental part of the constitutional

three-tier system, which is “unquestionably

legitimate.” Granholm, 544 U.S. at 488-89.

To the contrary, Wine Country focuses on the

Granholm prohibition on a_ state’s liquor laws

discriminating against out-of-state interests. Wine

Country acknowledges that the Court limited its

holding to discrimination benefitting alcohol on the

basis of its in-state production status, but Wine

Country argues that makes sense as that was the

Granholm dispute. Texas argues the Granholm

failure to mention retailers was significant, as

distinctions favoring in-state retailers are inherently

part of the three-tier system.

We first note what is not in issue. The

discrimination that Granholm invalidated was a

State’s allowing its wineries to ship directly to

consumers but prohibiting out-of-state wineries from

doing so. Texas grants in-state and out-of-state

wineries the same rights. TEX. ALCO. BEV. CODE §§

54.01-54.12.

44a

Such discrimination—among producers—is not

the question today. When analyzing what else is

invalid under the Supreme Court’s Granholm

reasoning, we find direciion in a source for some of

the Court’s language. The Court quoted a 1986

precedent that “a—eomprehensive—system—for—the

544 US. at 489 (quoting

North Dakota’ v. United States, 495 U.S. 423, 422

(1986)). North Daketa-empleyed-athreetier system

akotais:ssystem:iwas similar to that in Texas, in

which producers sell to state-licensed wholesalers,

who sell to state-licensed retailers. North Dakota,

495 U.S. at 428. That sort of system has been given

constitutional approval. ‘The discrimination that

would be questionable, then, is that which is not

inherent in the three-tier system itself. If

Granholm’s legitimizing of the tiers is to have

meaning, it must at least mean_ that. The

legitimizing is thus a caveat to the statement that

the Commerce Clause is violated if state law

authorizes “differential treatment of in-state and

out-of-state economic interests that benefits the

former and burdens the latter.” Granholm, 544 U.S.

at 472 (internal quotation marks and _ citation

omitted).

Therefore, the foundation on which we build is

that Texas may have a three-tier system. That

system authorizes retailers with locations within the

State to acquire Texas permits if they meet certain

eligibility requirements. Those retailers must

purchase their alcoholic beverages from ‘Texas-

licensed wholesalers, who in turn purchase from

producers. Each tier is authorized by Texas law and

approved by the Twenty-first Amendment—so says

Granholm—to do what producers, wholesalers, and

retailers do.®

Wine Country argues that the three tiers have

tumbled because Texas has permitted retailers to

make home deliveries within a confined range. At

least in part, .uis must be an argument that Texas

retailers are being allowed to act in ways that are

unacceptable for retailers in a constitutionally sound

system. The defect is one of discrimination: Texas

retailers are doing what a retailer in California or

Florida physically and practically can do, which is to

use a licensed shipper to deliver to a Texas

consumer, but legally cannot do.

To address the argument, it would be useful to

know what specific actions allegedly caused the

retailers to stop being Granholm-approved,

traditional third-tier retailers. If Texas allowed a

retailer to carry the beverages to a customer’s vehicle

parked in its lot, or across the street, would that be a

problem? If a retailer’s own delivery trucks traveled

to the customer, is that discrimination? Does

discrimination not begin until a retailer uses a

licensed shipper? Relevant to the answer, Texas has

not defended on the basis that retailers are just

6 Wine Country at oral argument emphasized a provision of

Texas law allowing Texas retailers to receive direct shipments

from Texas wineries, bypassing the wholesaler tier. See TEX.

ALCO. BEV. CODE § 110.053. This provision is not on the list of

those enjoined by the district court and is not a subject of this

appeal. Siesta Vill Mkt., 530 F. Supp. 2d at 851

A6a

permitted to serve their usual local markets in

enhanced, customer-friendly ways. Indeed, at oral

argument, the Texas Solicitor General said that the

geographical limits to local deliveries were

irrelevant. The prior state-wide delivery version of

the provision would be constitutional under that

argument. We need not and do not reach the broader

definitional issue.

In analyzing “retailing” for ‘Twenty-first

Amendment purposes, we find a useful warning in

concurring Judge Calabresi’s observations in

Arnold’s Wines. He found a tension between the

original (likely) meaning of the ‘Twenty-first

Amendment and the current interpretation, a change

largely the result of Supreme Court reaction to the

changing economic and _ social world since the

adoption of the Amendment. Arnold’s Wines, 571

F.3d at 198-201 (Calabresi, J., concurring). He also

concluded that uncertainty existed about the

direction the Supreme Court will take with its

developing interpretation of the Amendment. Yet he

agreed that the majority applied’ the best

understanding of its current meaning. The best

understanding is also what we seek.

We pull back from any effort to define the reach of

a traditional three-tier retailer. Instead, we resolve

whether what Texas has allowed here is_ so

substantially different from what retailing must

include as not to be third-tier retailing at all.

Because of Granholm and its approval of three-tier

systems, we know that Texas may authorize its in-

state, permit-holding retailers to make sales and

may prohibit out-of-state retailers from doing the

same. Such an authorization therefore is_ not

47a

discrimination in Granholm terms. The rights of

retailers at a minimum would include making over-

the-counter sales. Wine Country’s argument implies

that is where Granholm-approved retailing ends and

where the potential for discrimination begins. We

disagree. Texas has adjusted its controls over

retailers by allowing alcoholic beverage sales to

customers other than those who walk into a store.

Still, sales are being made to proximate consumers,

not those distant to the store. Retailers are acting as

retailers and making what conceptually are local

deliveries.

Our read of Granholm is that the Twenty-first

Amendment still gives each State quite broad

discretion to regulate alcoholic beverages. The

dormant Commerce Clause applies, but it applies

differently than it does to products whose regulation

is not authorized by a_=e specific constitutional

amendment. Regulating alcoholic beverage retailing

is largely a State’s prerogative.

Granholm prohibited discrimination against out-

of-state products or producers. Texas has not tripped

over that bar by allowing in-state retailer deliveries.

Yet it also has not discriminated among retailers.

Wine Country is not similarly situated to Texas

retailers and cannot make a logical argument of

discrimination. The illogic is shown by the fact that

the remedy being sought in this case—allowing out

of-state retailers to ship anywhere in Texas because

local retailers can deliver within their counties—

would grant out-of-state retailers dramatically

greater rights than Texas ones.

Wine Country argues that Texas has created the

need for that outsized remedy through its

48a

discrimination, and ‘Texas can _ eliminate local

unfairness by broadening the rights granted its own

retailers. The problem with the argument is that it

ignores the Twenty-first Amendment. When

analyzing whether a State’s alcoholic beverage

regulation discriminates under the dormant

Commerce Clause, a beginning premise is_ that

wholesalers and retailers may be required to be

within the State. Starting at that point, we see no

discrimination in the Texas law.

We view local deliveries as a constitutionally

benign incident of an acceptable three-tier system.

That view is consistent with the unquestioning

reference by the Supreme Court in Granholm to a

Michigan statute that authorized retailers to make

home deliveries under certain conditions. Granhelm,

544 U.S. at 469.7 A State’s granting this authority to

retailers is neither recent nor unique. ‘Texas has

permitted direct delivery and carrier shipment by in-

state retailers at least since 1977. TEX. ALCO. BEV.

CODE §22.03 (Vernon 2006, adopted Sept. 1, 1977).

Some other States also allow delivery by in-state

retailers. A State’s right to authorize a variety of

7 Michigan has subsequently repealed this provision and

banned all direct shipment by retailers, perhaps in response to

the ruling of the district court in Siesta Vill. Mkt., 596 F. Supp.

2d 1035. See MICH. COMP. LAWS ANN. § 436.1203(2) (amend. eff.

March 31, 2009)).

8 See, e.g., COLO. REV. STAT. ANN. § 12-47-407(3) & § 408(3):

FLA, STAT. ANN.§ 561.57(1); 235 ILL. COMP. STAT. ANN. § 5/5-

1(d); IND. CODE ANN. § 7.1-3-9-9; IOWA ADMIN. CODE r. 185

17.1(1); ME. REV. STAT. ANN. tit. 28-A, § 2077(2) & (3); MD.

CODE ANN. art. 2B, § 2-301(b)(1); MASS. GEN. LAWS ANN. ch.

49a

retail practices for alcoholic beverages free of

dormant Commerce Clause barriers may not be

limitless. Yet it seems to us that implementing

consumer-friendly practices for in-state retailing of

these products often has more to do with changing

economic realities than with the Constitution.

__On rehearing, Wine Country argues that we

disregarded the methodology required to analyze this

kind of claim. When statutes that regulate alcohol

facially discriminate against out-of-state interests,

generally we ask two questions: (1) do the statutes

violate the Commerce Clause and, (2) if so, are they

saved by Section 2 of the Twenty-First Amendment?

Dickerson, 336 F.3d at 395-96 (citing Brown-Forman

istillers Corp. v. New York State Liquor Auth., 476

5. 573, 578-79, 584-85 (1986)). After Dickerson,

though, the Supreme Court reiterated the legitimacy

of the three-tier system. Granholm, 544 U.S. at 489.

The present appeal challenged an inherent aspect of

that system. Because Granholm told us that the

three-tiers are legitimate under the Twenty-first

Amendment, we did not need to take the steps of

Dickerson first. In effect, Granholm already worked

out the answer to the analysis.

Also” alleged is that we disregarded Cooper uv.

McBeath, 11 F.3d 547 (5th Cir. 1994). There we

invalidated a requirement that certain alcohol

permits could be issued only if the recipient had been

a Texas resident for one year. Jd. at 555. Our case

138, § 22; MINN. R. 7515.0580; N.J. ADMIN. CODE § 13:2-20.3;

N.Y. COMP. CODES R. & REGS. tit. 9, § 67.1; 02-040-016 R.I

CODE R. § 4(10).

50a

concerns physical location of businesses; Cooper

concerned legal residence of owners. The former is a

critical component of the three-tier system, while the

latter i is not involved. The opinions are consistent! —

We hold We concl conclude that the limited rights

Texas has given its state-licensed retailers to make

deliveries do not transgress the dormant Commerce

Clause.

There is one final issue. We mentioned that the

remedy ordered by the district court was to require

[fexas to issue retailer permits to out-of-state

retailers. Such permit holders wherever located

could ship directly to Texas residents. Also

benefitted by the district: court’s order were those

individuals who wanted to avoid the limit Texas

placed on the quantity of alcoholic beverages that

could be purchased out-of-state and then be taken

into Texas for personal use! TEX. ALCO. BEV. CODE §§

107.05(a) & 107.07(a). Prehminarityitsheuld net-be

everloeked that Texas-—did noet,indeedean not, tmit

the number of ateohehe beverages esrnsumers may

buy at-an-eut-ef-state retatder— Any purehase tats

would havetoe come from +heotherstate-staws—_ The

barrterPexas+tmpese: +6 its -berder.

We-eonehidethatthe incidentateffeet_onfeoreien

retail sales resulting from mits on quantities tobe

brought inte Texas is —#t- werst—an- reeeptable

balaneme— The interests -of fexas—eansumers an

purehasme aleohehe-beverages outside of Pexas are

reessnized,— but the States valedly aasists that the

vact-majority of the sleehele beve rapes ebHstHners it

Pexas—be—obtamedthreugh—_its—_own retaters-—tn

effeet,_Pextis hes vranted timited exeeption te the

three-tier system.—_We- find no eonstitutional defect.

5la

See Brooks, 462 #34 at 365.54 {similar provision i

Verginia law —apheld agamst dormant Commerce

Cleuse—ehallenge); If the person entering Texas

could show that the alcohol being transported for

ersonal use was bought from an out-of-state holder

f one of the newly-mandated Texas retailer permits,

no limit on quantity could be imposed. If the alcohol

was. not So purchased, t the quantity ¢ could be limited.

__[We have held that Texas can require its

authorized retailers to sell from locations physically

located in Texas. Therefore, the dormant Commerce

Clause does not support ordering Texas to issue

retail permits for use at out-of-state locations. No

other issue about the personal importation limit is

meaningfully raised. We leave the provision fully in

force!

CONCLUSION

We-reverse the-distrieteeurts _heldime thatthe

personel —_anpert—exeeption— authormed—_by— Texas

Adeehehe—Beveraze—_-Gede—seetions—_107.05(a)— and

104-07(a}, has—_any—_edefeet—mder the dermrant

Commeree Clause.

We-olise reserve the distiet-eotiris tive hdation of

provisten that only retailers witha physical presernee

within the State eould dehver te—eensimers- in the

State. “Phe previstons ts dated by the distyet court

are—Lexas—_Aldeohohe Beverage Codeseetiens 604,

14.01, 22.01,22.08,24.04 24.938,-3870438408-37 03,

41.01,43.04,-5442-and 107.07.

We reverse the district court’s judgment in

validating the requirement that only retailers with a

physical presence within the State could receive

retailer permits or deliver to consumers in the State

oZ2a

The provisions as listed by the district court were

(Texas Alcoholic Beverage Code sections 22.03, 24.03,

54.12, and 107.07(f). We reinstate those to the

extent the district court’s judgment nullified them:

Our reversal leaves in place the district court’s

voiding of provisions that retailers be Texas citizens

for one year. No challenge to that ruling was

brought to us.

| Nothing in this opinion precludes’ the

enforcement, as written, of the personal importation

exception authorized by Texas Alcoholic Beverage

Code sections 107.05(a) and 107.07(a):

Consequenth—imn these In these respects the

district court’s judgment is VACATED. We

REMAND for entry of judgment consistent with this

opinion.

53a

Case: 08-10146 Document: 00511213363 Date Filed: 08/24/2010

IN THE UNITED STATES COURT OF

APPEALS FOR THE FIFTH CIRCUIT

No. 08-10146

WINE COUNTRY GIFT BASKETS.COM; K&L

WINE MERCHANTS; BEVERAGES & MORE INC;

DAVID L TAPP; RONALD L PARRISH; JEFFREY R

DAVIS

Plaintiffs — Appellants-Cross-Appellees

Vv.

JOHN T. STEEN, JR., Commissioner of “he Texas

Alcoholic Beverage Commission; GAIL MADDEN,

Commissioner of the Texas Alcoholic Beverage

Commission; JOSE CUEVAS, JR., Commissioner of

the Texas Alcoholic Beverage Commission

Defendants — Appellees-Cross-Appellants

ALLEN STEEN, in his official capacity as

administrator of the Texas Alcoholic Beverage

Commission

Defendant — Appellee-Cross-Appellant

GLAZERS WHOLESALE DRUG COMPANY, INC;

REPUBLIC BEVERAGE COMPANY

Intervenor Defendants — Appellees-Cross-Appellants

Appeals from the United States District Court for the

Northern District of Texas, Dallas

ON PETITION FOR REHEARING EN BANC

(Opinion _ > 7 , F.3d _ )

54a

Before JOLLY, PRADO, and SOUTHWICK,

Circuit Judges.

PER CURIAM:

(x) Treating the Petition for Rehearing En Banc

as a Petition for Pane] Rehearing, the Petition for

Panel Rehearing is DENIED. No member of the

panel nor judge in regular active service of the court

having requested that the court be polled on

Rehearing En Banc (FED. R. APP. P. and 5TH Cir. R.

35), the Petition for Rehearing En Banc is DENIED.

() Treating the Petition for Rehearing En Banc

as a Petition for Panel Rehearing, the Petition for

Panel Rehearing is DENIED. The court having been

polled at the request of one of the members of the

court and a majority of the judges who are in regular

active service and not disqualified not having voted

in favor (FED. R. App. P. AND 5TH CIR. R. 35), the

Petition for Rehearing En Banc is DENIED.

ENTERED FOR THE COURT:

/s/_ Leslie H. Southwick

United States Circuit Judge

55a

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF TEXAS

DALLAS DIVISION

SIESTA VILLAGE MARKET, LLC, d/b/a SIESTA

MARKET, et al.,

Plaintiffs,

VS.

RICK PERRY, Governor of Texas, et al.,

Defendants.

Civil Action No. 3:06-CV-0585-D

(Consolidated with Civil Action

No. 4:06-CV-0232-D)

FITZWATER, Chief Judge:

These are consolidated actions in which plaintiffs

challenge various provisions of the Texas Alcoholic

Beverage Code (“Code”) as unconstitutional under

the dormant Commerce Clause because’ they

preclude out-of-state wine retailers from selling and

snipping wine to Texas consumers. Intervenors—

two Texas-licensed wine wholesalers—defend the

constitutionality of the challenged Code provisions,

and they assert claims arising from an agreed

preliminary injunction (“Agreed Injunction”) entered

into by certain plaintiffs and the Administrator of

the Texas Alcoholic Beverage Commission (“TABC”)

that allows out-of-state retailers to ship wine directly

to Texas consumers. The court concludes that Texas’

56a

ban on the sale and shipment of wine by out-of-state

retailers to Texas residents is unconstitutional, but it

also holds that the requirement that wine retailers—

including out-of-state retailers—first purchase such

wine from Texas-licensed wholesalers is

constitutional.

Plaintiffs the Siesta Village plaintiffs! and the

Wine Country plaintiffs? challenge the

constitutionality of various Code provisions on the

ground that they preclude out-of-state wine retailers

from selling and shipping wine to consumers located

in the state of Texas. The Code sections at issue are

Tex. Alco. Bev. Code §§ 6.01, 6.03, 11.01, 11.03,

11.46(a)(11), 11.61(b)(19), 22.01, 22.03, 24.01, 24.03,

41.01, 54.12, 107.05(a), 107.07(a), 107.07(f), and

109.53 (Vernon 2007 & Supp. 2007-08). Insofar as

relevant to this lhtigation, these provisions ban the

sale and shipment of wine by out-of-state retailers to

Texas consumers, and they impose permit and

citizenship requirements on wine retailers that

plaintiffs maintain are unconstitutional as applied to

out-of-state retailers. They also ban the importation

of wine by Texas residents, except in limited

! Pleintiffs the Siesta Village plaintiffs consist of plaintiffs

Siesta V llage Market, LLC, a wine retailer located in the state

of Florida, and Ken Travis, Ken Gallinger, Maureen Gallinger,

and Dr. Robert Brockie, consumer residents of the state of

Texas.

2 The Wine Country plaintiffs consist of plaintiffs Wine

Country Gift Baskets.com, K&L Wine Merchants, and

Beverages & More, Inc., wine retailers located in the state of

California, and David L. Tapp, Ronald L. Parrish, and Jeffrey

R. Davis consumer residents of the state of Texas.

57a

quantities for personal use. The Siesta Village

plaintiffs and the Wine Country plaintiffs contend

that these laws discriminate against interstate

commerce, in violation of the dormant Commerce

Clause.

The defendants are John T. Steen, Jr., Gail

Madden, and Jose Cuevas, Jr., who are sued in their

official capacities as TABC Commissioners; Alan

Steen (“Steen”), sued in his official capacity as

Administrator of the TABC; and Rick Perry

(“Governor Perry’) and Greg Abbott (“General

Abbott”), sued in their official capacities as Governor

and Attorney General of Texas, respectively.

Intervening on behalf of the Texas regulatory

scheme are TABC-licensed wholesalers Glazer’s

Wholesale Drug Company, Inc. (“Glazer”) and

Republic Beverage Company (“Republic”). Glazer and

Republic have also filed a cross-claim against Steen?

and counterclaims against plaintiffs. Essentially,

they defend the constitutionality of the Code

provisions that plaintiffs challenge, and _ they

complain that defendant Steen has violated their

rights under the Equal Protection Clause and

Commerce Clause through a policy .£ not enforcing

the Code against out-of-state wine retailers and by

entering into the Agreed Injunction.‘

3 Although the cross-claim refers to all defendants, only

Steen answered the cross-claim, and it is clear from the record

that he is the only defendant whom Glazer and Republic

intended to include as a defendant.

4 The cross-claim against Steen is only based on the Agreed

Injunction. Glazer and Republic also compiain in. their

58a

The sale, shipment, and delivery of wine in Texas

is governed by the Code, Tex. Alco. Bev. Code §§

1.01-251.82 (Vernon 2007 & Supp. 2007-08). Like

other states, Texas regulates the sale and

importation of most alcoholic beverages—including

wine—through a three-tier system. Producers of

alcoholic beverages must be licensed by the TABC

and are legally able to sell in Texas only to TABC-

licensed® wholesalers, who in turn may only legally

sell to TABC-licensed retailers, who may then legally

sell to Texas consumers. The Code makes an

exception for wine producers or for wineries who hold

either a TABC winery permit or a TABC out-of-state

winery direct shipper permit that allows them to sell

directly to Texas consumers without selling first to a

licensed wholesaler or retailer.

Various Code provisions forbid anyone from

holding a TABC permit or otherwise selling wine in

Texas who has not been a Texas citizen for at least

one year. See Tex. Alco. Bev. Code §§ 6.03,

11.46(a)(11) 11.61(b)(19), 24.01(c), and 109.53. These

provisions have been declared unconstitutional as

applied to wholesalers located within the state of

Texas for less than one year. S. Wine & Spirits of

summary judgment briefing that, before the Agreed Injunction

was entered, the TABC adopted a policy of not enforcing the

Code against out-of-state retailers.

5 The Code distinguishes a “permit” (for wine and spirits)

from a “license” (for beer only). See Tex. Alco. Bev. Code

§§ 11.01(a) and 61.01 (Vernon 2007). Because the parties use

the terms “permit” and “license” interchangeably, the court will

do so as well.

59a

Tex. v. Steen, 486 F. Supp. 2d 626, 633 (W.D. Tex.

2007). As the court explains infra in § III(B), their

constitutionality has not yet been determined as to

out-of-state retailers.

Through provisions separate from the citizenship

requirements, the Code also allows in-state retailers

to sell and ship wine to Texas consumers, but the

Code denies this right to out-of-state retailers. See

Tex. Alco. Bev. Code §§ 22.03, 24.03, 54.12, and

107.07(f). With limited exceptions, the Code also

forbids consumers from purchasing wine from out-of-

state retailers. See id. §§ 107.05(a) and 107.07(a).®

After the Wine Country plaintiffs filed their

lawsuit, they and defendant Steen entered into the

Agreed Injunction, which permits’ out-of-state

retailers to ship wine directly to Texas consumers.’

In addition to siding with defendants in defending

the regulatory scheme, intervenors Glazer and

Republic complain that the Agreed Injunction is

detrimental to the public interest of the State of

Texas (“State”). They maintain that the Agreed

Injunction undermines the _ State’s temperance

concerns, causes the State to lose tax revenues, and

undermines the State’s orderly markets by not

© These provisions have been declared unconstitutional as

applied to purchases from out-of-state wine producers. See

Dickerson v. Bailey, 336 F.3d 388, 397, 402-03 (5th Cir. 2003).

7 The parties entered into the Agreed Injunction before

these two cases were consolidated. Another judge of this court

approved the agreed relief before transferring to the

undersigned’s docket the case in which the Agreed Injunction

was entered.

60a

requiring out-of-state retailers to comply with the

regulations imposed on in-state retailers. Glazer and

Republic also bring a cross-claim against defendant

Steen, alleging that the TABC lacked authority te

contradict the legislative requirements of the Texas

three-tier system when the parties entered into the

Agreed Injunction. Glazer and Republic contend that

by not enforcing Texas law against out-of-state

retailers, the TABC has compromised the business

interests of ale xolic beverage wholesalers, and that

the discriminatory enforcement of the Code against

in-state retailers has only provided a competitive

advantage to out-of-state businesses. Glazer and

Republic complain that such conduct amounts to an

unequal application of state law, and thus violates

their rights under the Commerce Clause and Equal

Protection Clause. Based on their cross-claim, they

request that the Agreed Injunction be vacated.

Glazer and Republic also bring’ counterclaims

requesting that the court declare that the Code

provisions that plaintiffs challenge as

unconstitutional are in fact constitutional and valid

components of the Texas three-tier system.

The following motions are pending for resolution

and have been orally argued: (1) intervenors’ April

26, 2007 motion to dissolve the Agreed Injunction; (2)

the Siesta Village plaintiffs’ May 29, 2007 motion (as

corrected June 8, 2007) for summary judgment; (3)

intervenors’ June 28, 2007 motion (as amended June

29, 2007) for summary judgment as to the

consolidated plaintiffs’ claims and as to intervenors’

counterclaims; (4) intervenors’ June 28, 2007 motion

(as amenced June 29, 2007) for summary judgment

as to their cross-claim against defendant Steen; (5)

defendants’ June 29, 2007 motion for summary

6la

judgment on plaintiffs’ claims; (6) defendant Steen’s

June 29, 2007 motion for summary judgment on

intervenors’ cross-claim; (7) the Wine Country

plaintiffs’ June 29, 2007 motion for summary

judgment on the Wine Country plaintiffs’ claims; and

(8) the Wine Country plaintiffs’ June 29, 2007 motion

for summary judgment on intervenors’

counterclaims.®

I]

Before reaching the merits of plaintiffs’

constitutional claims, the court must consider certain

preliminary questions, the first of which is an

Eleventh Amendment immunity defense _ that

defendants raise on behalf of Governor Perry and

General Abbott.

A

When state officials such as Governor Perry and

General Abbott are sued in their official capacities,

they assume the identity of the state that employs

them and thus’ share the state’s Eleventh

Amendment immunity from private suits. See Hafer

v. Melo, 502 U.S. 21, 26-27 (1991). The doctrine of

Ex Parte Young carves out a narrow exception to this

general grant of immunity and permits private

parties to obtain injunctive relief against state

officers for violations of federal law. P.R. Aqueduct

8 The parties seek to exclude portions of the summary

judgment evidence. Because the court has not relied on the

challenged evidence in deciding these motions, it denies these

requests as moot.

& Sewer Auth. v. Metcalf & Eddy, Inc., 506 U.S. 139,

146 (1993). But

[iJn making an officer of the state a party

defendant in aé_e suit to enjoin. the

enforcement of an act alleged to be

unconstitutional, it is plain that such

officer must have some connection with

the enforcement of the act, or else it is

merely making ... the state a party.

Ex Parte Young, 209 U.S. 123, 157 (1908) (emphasis

added).

The Fifth Circuit has reaffirmed the nexus

requirement between the statute being challenged

and the state officer's duty to enforce it. See

Okpalobi v. Foster, 244 F.3d 405, 416 (5th Cir. 2001)

(en banc) (holding that Young “exception only applies

when the named defendant state officials have some

connection with the enforcement of the act and

‘threaten and are about to commence proceedings’ to

enforce the unconstitutional act.” Jd. (emphasis in

original) (quoting Young, 209 U.S. at 155-56)).

“Thus, any probe into the existence of a Young

exception should gauge (1) the ability of the official

to enforce the statute at issue under his statutory or

constitutional powers, and (2) the demonstrated

willingness of the official to enforce the statute.” Jd.

at 417. The plaintiffs in Okpalobit sued the

Louisiana Governor and Attorney General to enjoin

enforcement of a state statute. Id. at 409. While the

statute being challenged “on its face, [did] not direct

the State or its officers to do anything,” a Fifth

Circuit panel held that the suit against the Governor

and Attorney General fit within the Young exception,

because each had a general duty to uphold and

63a

enforce state law. Jd. at 417. The en banc Fifth

Circuit reversed and dismissed the state officials

from the suit, holding that the panel had erred in

interpreting Young as relaxing the “special charge”

requirement of Fitts v. McGhee, 172 U.S. 516, 529

(1899) (dismissing state officials from suit for

injunctive relief because neither was_ specially

charged with duty to enforce’ statute being

challenged). Jd. at 419. “In sum, Young does not

minimize the need to find an actual enforcement

connection—some enforcement power or act that can

be enjoined—between the defendant official and the

challenged statute.” Id.

B

Defendants contend that Governor Perry lacks

sufficient enforcement powers over the TABC to be a

proper defendant ina Young suit. The court agrees.

It is clear that Governor Perry’s general

responsibility to defend the Texas Constitution and

the laws of the state falls short of Fitts’s “special

charge” requirement. The Code broadly commits its

enforcement to the three TABC Commissioners. See

Tex. Alco. Bev. Code §§ 5.02 and 5.31. Although the

Code does grant the Governor, with the advice and

consent of the Senate, the authority to appoint the

Commissioners to six-year terms, itd. § 5.02, there is

no authority granting the Governor control of the

actions of the Commissioners once they are

appointed. Indeed, the Code severely restricts the

grounds to remove a Commissioner. See id. § 5.051.

Thus Governor Perry’s appointment authority over

the Commissioners does not confer on him

enforcement power over the TABC.

64a

The Siesta Village plaintiffs point to Governor

Perry’s authority over Special Inspectors as a

sufficient connection to enforcement of the

challenged statutes. See id. § 5.142(b) (Vernon

2007). But these Special Inspectors are also subject

to the orders of the TABC, and only the TABC

decides whether Special Inspectors exist at all, id. §

5.142(a). Moreover, the Commissioners can remove a

Special Inspector at any time for cause. Jd. §

5.142(e). The Siesta Village plaintiffs do not contend

that the Commissioners have appointed anyone as a

Special Inspector. Without Special Inspectors,

Governor Perry has no enforcement power over the

TABC. But even if Special Inspectors do exist, the

Code suggests that they serve an ancillary role in

enforcing the Code. Their term of service is

expressly limited to fewer than two years, they are

removable by the TABC at any time for cause, and

they are not entitled to take compensation from the

State. See id. § 5.142(d) and (e). Therefore,

Governor Perry’s concurrent power over TABC

Special Inspectors does not grant him sufficient

enforcement power over the TABC to be a proper

defendant in a Young suit.

Accordingly, the court dismisses Governor Perry

as a defendant.

C

General Abbott, in contrast with Governor Perry,

has statutory authority to enforce the Code. Among

his powers is the explicit authority to “begin

proceedings in district court to restrain [a] person

from violating the code or operating under [a] permit

or license.” TJd. § 101.01(c). Once the Attorney

General obtains an injunction under this provision,

65a

the enjoined party’s violation of the injunction

“operates to cancel without further proceedings any

license or permit held by the person.” Jd. To assist

in investigating violations, the Code confers on the

Attorney General the power to examine the records

of any permittee “as often as he considers necessary.”

Id. § 37.12. Section 109.53 of the Code—one of the

one-year Texas residency and citizenship provisions

that plaintiffs challenge—confers on the Attorney

General the authority to sue any company permit

holder who is violating the Texas citizenship

requirement for cancellation of the company’s

corporate charter. The court therefore holds that

General Abbott is “specially charged” with enforcing

the Code.

Defendants contend that even if this 1s so, it does

not entirely resolve the question of General Abbott’s

amenability to suit under Young. Okpalobi requires

that, in addition to establishing General Abbott's

ability to enforce the Code, plaintiffs must

demonstrate his demonstrated willingness to do so.

See Okpalobi, 244 F.3d at 417. Consistent with this

requirement, the Supreme Court has emphasized

that, before Young relief is available, “the prospect of

[a] state suit must be imminent.” Morales v. Trans

World Airlines, Inc., 504 U.S. 374, 382 (1992) (“Ex

parte Young thus speaks of enjoining state officers

‘who threaten and are about to commence

proceedings.” (quoting Young, 209 U.S. at 156)

(emphasis 1n_ original)). Defendants submit

affidavits from two TABC officials who attest that

they are not aware of any instance in which the

TABC has asked the Attorney General to seek an

injunction to enforce the Code. They also point to the

Siesta Village plaintiffs’ failure to produce evidence

66a

that Genera! Abbott has threatened, or shown a

willingness, to enforce the Code provisions being

challenged.

Defendants’ affidavits establish only that the

TABC has not requested that the Attorney General

exercise his statutory authority to enforce the Code,

not that the Attorney General has not done so. The

Attorney General’s authority to initiate proceedings

against those who violate the Code is not contingent

on the TABC’s approval or request. See Tex. Alco.

Bev. Code §§ 101.01 and 109.53.

But the court agrees with defendants that

General Abbott should be dismissed as a defendant

based on their other argument: that the Siesta

Village plaintiffs have failed to produce any evidence

that General Abbott has threatened to enforce, or

has previously enforced, the challenged provisions.

Without proof of General Abbott’s willingness to

enforce the Code provisions at issue, the Siesta

Village plaintiffs cannot rely on Young to overcome

his Eleventh Amendment immunity. The Young

doctrine carves out a narrow exception to such

immunity, see P.R. Aqueduct & Sewer Authority, 506

U.S. at 146, and the Siesta Village plaintiffs have

failed to satisfy Okpalobi's “demonstrated

willingness” prong for obtaining Young-type relief.

Accordingly, the court dismisses General Abbott

as a defendant.

The second preliminary question the court must

address before deciding the merits of plaintiffs’

constitutional claims is defendants’ contention that

the Texas Legislature’s enactment of S.B. 1229,

67a

which amended § 22.03 of the Code, and Judge

Yeakel’s decision in Southern Wine, 486 F. Supp. 2d

626, render moot the constitutional challenges that

plaintiffs have pleaded.

A

“It is well-settled ... that mootness is a threshold

jurisdictional inquiry.” La. Enotl. Action Network v.

U. S. Enovtl. Protection Agency, 382 F.3d 575, 580

(5th Cir. 2004) (citing Deakins v. Monaghan, 484

U.S. 193, 199 (1988)). “A case is moot if the issues

presented are no longer live.”. AT&T Comme'ns of

the Sw., Inc. v. City of Austin, 235 F.3d 241, 243 (5th

Cir. 2000) (internal quotation marks omitted). “The

court looks to the rehef that [the plaintiffs] seek to

determine whether their case has become moot.”

Wightman-Cervantes v. Texas, 2005 WL 770598, at

*2 (N.D. Tex. Apr. 6, 2005) (Fitzwater, J.).

Plaintiffs ask the court to declare

unconstitutional and to enjoin the Code’s citizenship

requirement, as applied to out-of-state retail permit

holders. Defendants concede that S.B. 1229 has no

effect on these requirements. Rather, they maintain

that Southern Wine abrogates them and affords

plaintiffs the rehef they seek. The State has not

appealed the Southern Wine decision, and it has

committed to this court that it will not enforce the

citizenship requirement in the future.

In Southern Wine Judge Yeakel of the Western

District of Texas declared unconstitutional and

enjoined the Code provisions that required the TABC

to deny a permit to an applicant for failing to meet

the one-year Texas” residency and citizenship

requirement. S. Wine, 486 F. Supp. 2d at 633 (“The

Court concludes that Texas’s one-year durational

68a

residency and citizenship statutes fail Commerce

Clause scrutiny|.]”). Defendants maintain that there

is no indication that they will fail to abide by the

injunction in Southern Wine, which they contend is

sufficiently expansive to include the relief that

plaintiffs seek here.

B

The court concludes” that c¢efendants have

overlooked important differences between Southern

Wine and the instant litigation, and that Judge

Yeakel’s decision does not render plaintiffs’ claims

moot.

First, the Southern Wine plaintiffs were out-of

state wine wholesalers who challenged TABC

decisions to deny their applications for wholesale

licenses based on the Code’s one-year citizenship

requirement. /d. at 628-29. Arguments presented in

defense of the Code provisions, and rejected by the

Southern Wine court, were specifically tailored to the

statute’s application to wholesalers rather than

retailers.” See id. at 632 (“The one-year durational!

residency and citizenship statutes fail to pass

constitutional muster because the TABC has failed

in its burden to prove that no nondiscriminatory

alternative means are available to Texas to address

% In highlighting the retailer-wholesaler distinction, the

court is not endorsing the view that retailers and wholesalers

are materially different in relation to the Code’s citizenship

requirements. Instead, it is pointing out that there are

components of the rationale for the Southern Wine decision that

do not apply to retailers and thus distinguish that case.

69a

the state’s interest in ensuring that those who

distribute alcoholic beverages have a stake in the

welfare of the community in which they operate.”)

(emphasis added)).'° There is ne indication that the

Southern Wine court considered possible

justifications for applying the one-year residency and

citizenship requirement to retailers as opposed to

wholesalers. Thus Southern Wine is not sufficiently

broad to cover retailers.

Second, unlike the plaintiffs in Southern Wine,

who formed a Texas corporation to do business in

Texas and “intend[ed] to operate facilities physically

located in Texas,” td. at 629, the retailer-plaintiffs in

this litigation do not intend to become ‘Texas

res.dents or open stores in this state. Rather, they

seek permits to sell wine at retail without becoming

‘Texas residents. Thus while Southern Wine strikes

down the one-year durational residence = and

citizenship requirement as unconstitutional, these

plaintiffs seek a declaration that any citizenship

requirement is unconstitutional, a question not

addressed in Southern Wine. See td. at 633.

Although defendants commit not to enforce the

Texas citizenship requirement, they offer no

authority to suggest that this htigation-position

would in all circumstances bind the State or the

TABC. Accordingly, the court concludes’ that

plaintiffs’ constitutional challenges to the citizenship

requirement is not moot.

10 The court equated distributors with wholesalers 5

Wine, 486 F. Supp. 2d at 628-29.

70a

&

The court considers next the effect of the

enactment of S.B. 1229 on this litigation.

Shortly before the summary judgment) motions

were filed in these cases, the Texas Legislature

passed 5.B. 1229, which circumscribes the shipping

righis of in-state wine retailers."! Defendants

contend that this amendment moots plaintiffs’

ll As amended, § 22.03(a) provides

The holder of a packape store permit or wine only

package store permit issued for a location within a

city or town or within two miles of the corporate limits

of a city or town, who also holds a local cartage

permit, may make deliveries of and collections for

alcoholic beverages off the premises in areas where

the sale of the beverayes is legal. The permittee must

travel by the most direct route) and may make

deliveries and collections only within the county or

the city or town or within two miles of its corporate

limits, and only in response to bona fide orders placed

by the customer, either in person at the premises, 1n

writing, by mail. or by telegraph or telephone. This

section shall not be construed as preventing a holder

of a package store permit or wine only package store

permit. from delivering alcoholic beverayes to the

holder of a carrier’s permit for transportation to

persons who have placed bona fide orders and who are

located in an area that the holder of a package store

permit or wine only package store permit, who also

holds a local cartage permit, is authorized to directly

deliver to under this section. The holder of a package

store permit or wine only package store permit may

also deliver alcoholic beverages to the holder of a

carrier's permit for transportation outside of this state

in response to bona fide orders placed by persons

authorized te purchase the beverages.

Tla

pleaded chailenge to the pre-amendment direct-

shipping provisions of the Code.!?

Generally, “|sJuits regarding the constitutionality

of statutes become moot once the statute is

repealed.” McCorvey v. Hill, 385 F.3d 846, 849 (5th

Cir. 2004). There is an exception, however, when

“there 1s evidence, or a legitimate reason to believe,

that the state will reenact the statute or one that ts

substantially similar.” Id. at 849 n.3 (emphasis

added) (citing City of Mesquite v. Aladdin's Castle,

Inc , 455 U.S. 283, 289 (1982); Ne. Fla. Chapter of the

Associated Gen. Contractors of Am. v. City of

Jacksonville, 508 U.S. 656, 662 (1993)).

Prior to its amendment, § 22.03 of the Code

allowed licensed retailers to ship alcoholic beverages

to consumers statewide through the use of a common

carrier. See Tex. Alco. Bev. Code § 22.03 (Vernon

2006) (amended Sept. 1, 2007) (“This section shall

not be construed as preventing a [licensed retailer] ...

from delivering alcoholic beverages to the holder of a

carriers permit for transportation to persons

authorized to purchase the beverages); td. § 41.01

(providing that carrier permit holder may transport

liquor into and out of Texas and between points

within the state). Section 107.07(f) of the Code,

however, precluded out-of-state entities (except

wineries) from shipping wine to consumers within

the state.

12 Defendants do not contend that plaintiffs’ challenge to

T2a

Except as provided by Chapter 54, any

person in the business of selling alcoholic

beverages in another state or country who

ships or causes to be shipped any alcoholic

beverage directly to any Texas resident

under this section is in violation of this

code.

Tex. Alco. Bev. Code § 107.07(f) (recognizing that

Chapter 54 of the Code authorizes direct retail sale

and shipment of wine by. out-of-state wine

producers). Together, these provisions operated to

enable retailers who were physically located in Texas

to ship wine to residents throughout Texas, while

denying that same right to out-of-state retailers.

The recent amendment of § 22.03 circumscribes the

shipping rights of an in-state retailer by forbidding it

from shipping to a consumer outside the county in

which the retailer is located. Amended § 22.03 does

not, however, lift the ban on the sale and shipment of

wine by out-of-state retailers to Texas residents.

The essence of plaintiffs’ constitutional challenge

to pre-S.B. 1229 law is that Texas has violated the

dormant Commerce Clause by allowing in-state

retailers to sell and ship wine to some ‘Texas

residents, but denying that same right to out-of-state

retailers. Because current law, 1e., § 22.03 as

amended by S.B. 1229, has the same alleged defects,

it is “substantially similar” to the previous version

and does not moot plaintiffs’ constitutional challenge.

See Cooper v. McBeath, 11 F.3d 547, 550-51 (5th Cir.

1994) (holding that Texas Legislature’s amendment

of Code, while case was on appeal, lowering

citizenship requirement from three years to one year

did not moot constitutional challenge to three-year

T3a

requirement). The fact that S.B. 1229 reduces the

allegedly discriminatory advantage that in-state

retailers have over their out-of-state counterparts

does not moot the case, because “the [law’s] practical

effect remains the same: Plaintiffs, as non-Texans,

are treated differently.” /d. at 551. Thus there is

more than a “mere risk that [the Texas Legislature]

will repeat its allegedly wrongful conduct; it has

already done so.” /d. at 550 (quoting City of

Jacksonville, 508 U.S. at 662)).18 The court

concludes that plaintiffs’ claims are not moot.

13 Defendants attempt. to distinguish Cocper on the basis

that the statutory amendment in Cooper occurred while the

case was on appeal, not before the district court rendered

judgment. But nothing in Cooper, McCorvey, or City of

Jacksonville indicates that the — substantially-similar-

amendment principle apphes only to eases in which the

amendment occurs while the case is on appeal.

Defendants also cite Brazos Valley Coalition for Life, Inc. v.

City of Bryan, Texas, 421 F.3d 314 (5th Cir. 2005), in which the

Fifth Circuit held that the city’s ordinance amendment

enacted prior to the district court’s judgment—rendered moot

the plaintiffs’ constitutional challenge to the pre-amendment

ordinances. In that case the amended ordinance materially

altered the prior ordinances, and the plaintiffs did “not contend

that ... [the amended ordinance was] itself unconstitutional,

just that the City [could not] be trusted not to repeal [the

amendment and restore the offending ordinances].” /d. at. 321.

22 (rejecting challenge on grounds that there was “nothing

whatever to suggest that the City intendled] to [restore the

offending ordinances] when th[e] case [was] over’). The present

case is distinguishable. Texas has adopted an amended statute

that is substantially stmilar to the prior version and, as the

court. will explain, is unconstitutional when applied to out-of

state wine retailers.

74a

IV

In addition to challenging the pre-S.B. 1229

version of Texas law, the Siesta Village plaintiffs

maintain that the Code as amended is

unconstitutional. They assert this challenge for the

first time in their response to defendants’ motion for

summary judgment and in reply in support of their

own summary judgment motion. The court must

decide whether it can now consider this new claim

for relief.

«

A

]

When a party raises arguments outside the scope

of its pleadings, the court construes the arguments

as an implicit motion for leave to amend. See

Ganther v. Ingle, 75 F.3d 207, 211-12 (5th Cir. 1996)

(per curiam); Sherman v. Hallbauer, 455 F.2d 1236,

1242 (5th Cir. 1972). When the deadline to amend

pleadings has expired, a court considering a motion

to amend must first determine whether to modify the

scheduling order under the Fed. R. Civ. P. 16(b)(4)

good cause standard.!4 See S & W Enters., L.L.C. v.

SouthTrust Bank of Ala., N.A., 315 F.3d 533, 536

(5th Cir. 2003); Am. Tourmaline Fields v. Int'l Paper

Co., 1998 WL 874825, at *1 (N.D. Tex. Dec. 7, 1998)

(Fitzwater, J.). If the movant § satisfies the

requirements of Rule 16(b)(4), the court must next

14 The restyled Federal Rules of Civil Procedure took effect

December 1, 2007. The good cause standard is now found in

Rule 16(b)(4), which states that “[a] schedule may be modified

only for good cause and with the judge’s consent.”

T5a

determine whether to grant leave to amend under

the more liberal standard of Rule 15(a)(2), which

provides that “|t]he court should freely grant leave

given when justice so requires.” Rule 15(a)(2); S & W

Enters., 315 F.3d at 536; Am. Tourmaline Fields,

1998 WL 874825, at *1.

The court assesses four factors when deciding

whether to grant an untimely motion for leave to

amend. S & W Enters., 315 F.3d at 536. First, the

court considers the reason for the untimeliness. Id.

The statutory changes at issue here were enacted on

May 25, 2007. well after the January 4, 2007

deadline for seeking leave to amend pleadings, and

only four days before the Siesta Village plaintiffs

filed their first summary judgment motion. They

lacked any opportunity to seek leave to amend before

the court-ordered deadline.

The second factor pertains to the importance of

the amendment. Id. The parties have filed

approximately 20 briefs in htigating their respective

summary judgment motions, and the court has heard

two hours of oral argument. Defendants have relied

heavily on the amended version of § 22.03 for their

defense, expending considerable effort to support its

constitutionality. Likewise, both sets of plaintiffs

have vigorously attacked it.'5 Determining the

constitutionality of the amended version of § 22.03 is

19 Although the Wine Country plaintiffs prefer that the

court focus solely on the pre-amendment version of the statute

without considering the amended version, they have also

advanced ample argument regarding the amended statute's

unconstitutionality.

76a

vitally important to this case, because without doing

so, it will be impossible to decide one of its central

issues: whether out-of-state retailers may sell and

ship wine to Texas residents.

The third and fourth factors involve evaluating

the potential for prejudice and the availability of a

continuance to cure such prejudice. Jd. There is

little or no potential for prejudice here, because the

parties have had a fair opportunity to brief

thoroughly the constitutionality of the amended

version of § 22.03. No party wiil have been deprived

of a reasonable opportunity to raise available

arguments.

The court therefore concludes that all the

relevant Rule 16(b)(4) factors favor granting leave to

amend. The court discerns no compelling reason to

deny granting leave under the more liberal Rule

15(a)(2) standard. Accordingly, treating the Siesta

Village plaintiffs’ summary judgment briefing as a

motion for leave to amend, the court grants the

motion.

B

For similar reasons, the fact that the Siesta

Village plaintiffs did not challenge § 22.03 in their

summary judgment motion does not prevent the

court from reaching the merits of the claim. This

court has previously declined to consider grounds for

summary judgment that were not raised in a party’s

motion and opening brief. F.g., Jacobs v. Tapscott,

2006 WL 2728827, at *7 (N.D. Tex. Sept. 25, 2006)

(Fitzwater, J.) (“[T]he court will not consider an

argument raised for the first time in a reply brief.”

(quoting Senior Unsecured Creditors’ Comm. of First

RepublicBank Corp. v. FDIC, 749 F. Supp. 758, 772

Vda

(N.D. Tex. 1990) (Fitzwater, J.)), appeal docketed,

No. 07-10558 (5th Cir. May 22, 2007). But the court

retains the discretion to consider such an argument.

Ruggiero v. Warner-Lambert Co., 424 F.3d 249, 252

(2d Cir. 2005). “Rule 56(c) merely requires the court

to give the non-movant an adequate opportunity to

respond prior to a ruling.” Vias Arms, Inc. v. Vias,

383 F.3d 287, 292 (5th Cir. 2004) (internal quotation

marks omitted).

Unlike prior cases in which the court has declined

to consider arguments raised for the first time in

reply, all parties to this case have been able to

thoroughly brief, and orally argue, the ground of

relief that the Siesta Village plaintiffs assert for the

first time in their response and reply _ briefs.

Consequently, reaching the merits will not deprive

any opposing party of an adequate opportunity to

respond. The court will therefore address the Siesta

Village plaintiffs’ constitutional challenge to § 22.03,

as amended by S.B. 1229.

V

Having disposed of the preliminary questions

presented, the court now turns to the merits of

plaintiffs’ dormant Commerce Clause challenges to

the Code

A

The Constitution ants Congress the power to

D

“regulate Commerce ... among the several States[.]”

U.S. Const. art. I, § 8, cl. 3. This affirmative grant of

power implies a “negative” or “dormant” constraint

on state regulatory authority. E.g., Dennis v.

Higgins, 498 U.S. 439, 447 (1991); John Havlir &

Assocs., Inc. v. Tacoa, Inc., 810 F. Supp. 752, 754-55

78a

(N.D. Tex. 1993) (Fitzwater, J.). “[T]his negative

aspect of the Commerce Clause prohibits economic

protectionism—that is, regulatory measures

designed to benefit in-state economic interests by

burdening out-of-state competitors.” Dickerson uv.

Bailey, 336 F.3d 388, 395 (5th Cir. 2003) (quoting

Wyoming v. Oklahoma, 502 U.S. 437, 454 (1992)).

A statute implicates the dormant Commerce

Clause if it discriminates against interstate

commerce “either facially, by purpose, or by effect.”

Allstate Ins. Co. v. Abbott, 495 F.3d 151, 160 (5th Cir.

2007); see also John Havlir & Assocs., 810 F. Supp.

at 755. The statute’s challengers bear the initial

burden of establishing discrimination. Allstate, 495

F.3d at 160. If they carry this burden, the statute

will be deemed valid only if the state shows that the

law “advances a legitimate local purpose that cannot

be adequately served by reasonable

nondiscriminatory alternatives.” Granholm _ uv.

Heald, 544 U.S. 460, 489 (2005) (internal quotation

marks omitted); see also John Havlir & Assocs., 810

F. Supp. at 755. A statute that does not discriminate

is valid unless the burden imposed on interstate

commerce is “clearly excessive” in relation to the

putative local benefits. Allstate, 495 F.3d at 160

(citing Pike v. Bruce Church, Inc., 397 U.S. 137, 142

(1970)); John Havlir & Assocs., 810 F. Supp. at 755.

These principles apply with equal force to the

regulation of alcohol, notwithstanding the adoption

of § 2 of the Twenty-first Amendment.'® Granholm,

16 U.S. Const. amend. XXI, § 2:

79a

544 U.S. at 486 (“[T]he Twenty-first Amendment

does not supersede other provisions of the

Constitution and, in particular, does not displace the

rule that States may not give a discriminatory

preference to their own producers.”). The Twenty-

first Amendment merely “restored to the States the

powers they had” before Prohibition, and served to

“constitutionaliz[e} the Commerce Clause

framework” that was in existence at that time. Jd. at

484. The states were never authorized to

discriminate against interstate commerce’ with

respect to alcohol regulations, and the Twenty-first

Amendment did not create any new rights to do so.

Id. at 484-85.

B

The threshold question in any dormant

Commerce Clause analysis is whether the entities

between whom the state purportedly discriminates

are “similarly situated.” Unless they are, there can

be no violation of the dormant Commerce Clause.

Gen. Motors Corp. v. Tracy, 519 U.S. 278, 298-99

(1997). ‘Two or more entities are similarly situated

when there exists “actual or prospective competition

between the supposedly favored and disfavored

entities in a single market.” Jd. at 300.

[If] the different entities serve different

markets, and would continue to do so even

if the supposedly discriminatory burden

The 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.

80a

were removed ... eliminating the

regulatory differential would not serve the

dormant Commerce Clause’s fundamental

objective of preserving a national market

for competition undisturbed by

preferential advantages conferred by a

State upon its residents or resident

competitors.

Id. at 299.

Glazer and Republic maintain that the retailer-

plaintiffs are not similarly situated to the in-state

retailers with whom they attempt to compare

themselves. They posit that out-of-state retailers are

not potential competitors with in-state retailers

because Texas has a Twenty-first Amendment right

to exclude from competition any retailer who does

not participate in its three-tier system. This

argument misunderstands the purpose of the

“similarly situated” inquiry.

At this stage of the analysis, the court does not

consider whether Texas’ exclusion of out-of-state

entities from competition is justified. The court

addresses this question later, when it determines

whether the exclusion is evenhanded and/or

necessary to achieve legitimate state objectives. See

Allstate, 495 F.3d at 160. At the present analytical

stage, the court asks only whether, absent Texas’

legal barriers to entry, in-state and out-of-state

retailers would be in competition. See Gen. Motors,

519 U.S. at 298-300. Because the retailer-plaintiffs

and in-state wine retailers are engaged in the same

business—the sale of wine to retail consumers—and

seek access to the same market—Texas consumers—

they are potential competitors and are therefore

Sla

similarly situated for purposes of dormant Commerce

Clause analysis.

C

Having determined that out-of-state wine

retailers are similarly situated to in-state retailers,

the court now considers whether Texas law

discriminates against out-of-state wine retailers.

]

As described above, the pre-amendment form of

Texas law gave wine retailers who were physically

located in Texas the right to ship wine to residents

throughout Texas, while denying that right to out-of-

state retailers. See supra § III(C). Such laws plainly

discriminate against interstate commerce. See

Granholm, 544 U.S. at 474-75 (invalidating laws that

required wine producers to establish branch offices

or warehouses within state before shipping in in-

state commerce, reasoning that physical presence

requirements drive up cost of doing business for out-

of-state producers, and viewing with “particular

suspicion state statutes requiring business

operations to be performed in the home state that

could more efficiently be performed elsewhere.”

(internal quotation marks omitted)). Physical

presence requirements “run[ ] contrary to [the

Supreme Court’s] admonition that States cannot

require an out-of-state firm to become a resident in

order to compete on equal terms.” Jd. at 475

(internal quotation marks omitted).

The recent amendment of § 22.03 restricts the

rights of in-state retailers, but it nevertheless

perpetuates the discriminatory regime applied to

out-of-state retailers. Amended § 22.03 gives wine

R2a

retailers located within a Texas county the right to

sell and ship wine to consumers within that county.

Out-of-state wine retailers cannot sell or ship wine to

any Texas consumers at all.

2

a)

The arguments that defendants and intervenors

advance in support of the Code’s constitutionality are

unavailing.

Initially, Glazer and Republic appear to suggest

that the law is evenhanded because it gives all

retailers the right to sell and ship to consumers in

their respective counties, regardless whether they

are inside or outside the state. In other words, they

posit that, just as a wine retailer located in Texas

can sell wine at retail in the Texas county in which it

is located, a California wine retailer can sell wine

within the county in California in which it is located.

The relevant inquiry for purposes of dormant

Commerce Clause analysis, however, is whether a

state discriminates between in-state and out-of-state

interests with respect to access to in-state markets.

See Wyoming v. Oklahoma, 502 U.S. 437, 454 (1992)

(“Thfe] negative aspect of the Commerce Clause

prohibits economic protectionism ....”) (quoting New

Energy Co. of Ind. v. Limbach, 486 U.S. 269, 273-74

(1988)) (emphasis added) (internal quotation marks

omitted). ‘The Code facially discriminates in this

respect, giving in-state wine retailers access to the

direct-shipping markets of their respective counties,

while denying the same access to out-of-state wine

retailers.

Next, defendants maintain that the right to ship

within only a single Texas county is too small an

advantage to local retailers for the law to be

83a

discriminatory, and that the court should focus

instead on whether the Code treats in-state and out-

of-state interests equally with respect to the nght to

ship statewide. The court disagrees.

The in-state retailers’ right to ship within their

respective counties of location confers’ greater

benefits than defendants appear to acknowledge.

Nothing in the law prevents in-state retail chains

with brick-and-mortar locations in multiple counties

from shipping to consumers within each such county,

provided they ship within the county. Out-of-state

retailers have no access to any of these markets.

Moreover, even a retailer located within a single

Texas county may have a_esubstantial economic

advantage over an out-of-state counterpart. For

example, several million people (many of whom are

of drinking age) reside in Harris County, whose

population exceeds that of 24 states. See U.S.

Census Bureau, 2006 Population Estimates,

http://www.census.gov. Although a Harris County

retailer would have access to this market, an out-of-

state retailer would not.!7

1’ Under Supreme Court precedent, it is of no moment that

this right is also denied to other in-state retailers (1.e., those

located in other counties). See Fort Gratiot Sanitary Landfill,

Inc. v. Mich. Dep't of Natural Res., 504 U.S. 353, 355, 361

(1992) (invalidating state law that prohibited landfill operators

from accepting solid waste that onginated outside county in

which their facilities were located, whether or not waste came

from outside the state) (“[A] State (or one of its. political

subdivisions) may not avoid the strictures of the Commerce

Clause by curtailing the movement of articles of commerce

through subdivisions of the State, rather than through the

State itself.”)).

84a

And it makes no difference how limited the

shipping advantage is for in-state retailers. “[T]here

is no ‘de minimis’ defense to a charge. of

discriminatfion].”. Camps Newfound/Owatonna, Inc.

v. Town of Harrison, Me., 520 U.S. 564, 581 n.15

(1997) (internal quotation marks omitted). “{A]ctual

discrimination, wherever it is found, is

impermissible, and the magnitude and scope of the

discrimination have no bearing on the determinative

question whether discrimination has_ occurred.”

Associated Indus. of Mo. v. Lohman, 511 U.S. 641,

650 (1994). A law that relies on the requirement of a

physical, in-state location to afford some retailers the

right to sell and ship wine to Texas consumers, while

denying the same right to others who are located out-

of-state, is therefore constitutionally suspect,

regardless whether that right expands to the entire

state or is restricted to a single county. See id. The

cases that defendants cite involved evenhanded

statutes and actually highlight the reasons why the

challenged Code provisions are discriminatory. See

Brooks v. Vassar, 462 F.3d 341, 354-55 (4th Cir.

2006) (upholding personal importation exception to

Virginia's requirement that all alcohol be sold

through three-tier system because it “[was] not

economic protectionism ... [but] actually amount[ed]

to disadvantage local wineries whose wine may only

be purchased through [the three-tier system]”

(emphasis added)); Cherry Hill Vineyards, LLC v.

Hudgins, 488 F. Supp. 2d 601, 613-14 (W.D. Ky.

2006) (sustaining exception to state’s otherwise

8ba

absolute prohibition on direct shipment on grounds

that it was made available to both in-state and out-

of-state entities).!8

Defendants also contend that a system designed

only to ensure “close proximity transactions” cannot

be discriminatory. They rely on a handful of post-

Granholm decisions that sustain state requirements

that all wine sales be made through “face to face”

transactions. See Cherry Hill Vineyard, LLC ov.

Baldacci, 505 F.3d 28, 35 (1st Cir. 2007); Jelousek vu.

Bresden, 482 F. Supp. 2d 1018, 1022 (.D. Tenn.

2007); Hurley v. Minner, 2006 WL 2789164, at *6 (D.

Del. Sept. 26, 2006). Defendants’ reliance on these

cases 1s misplaced, because their holdings were

based expressly on the fact that the challenged

statutes involved evenhanded prohibitions of all

direct shipping, foreclosing the _ direct-shipping

market to everyone on equal terms. See Cherry Hill,

505 F.3d at 35 (€|[Granholm is. distinguishable

because] Maine flatly outlaws any and all direct

shipping of wine.... [T]here is no direct-shipping

market; neither in-state nor out-of-state wineries

may direct-ship.”); Jelousek, 482 F. Supp. 2d at 1022

(“Tennessee, by prohibiting [all] shipping ... creates

no specially advantageous State market which is

18 In one of their reply briefs, defendants recast their “de

minimis defense” as an argument that the court should look

only at substantive, rather than nominal, distinctions between

in-state and out-of-state entities. Because the substantive

effect of the Code provisions in question is to deny out-of-state

retailers access to the direct-shipping market enjoyed by in

state retailers, defendants’ change in terminology does not

warrant a different result

86a

then available only to State residents.”); Hurley,

2006 WL 2789164, at *6 (“The key fact in the case at

bar is that ... neither in-state nor out-of-state

wineries are allowed to deliver wine directly to

Delaware residents’ homes.”). If the challenged

statutes had, lhke those here, “created a _ direct-

shipping market for wine[,] ... allowed direct

shipping on- particular conditions, and_ those

conditions were rigged to favor in-state wineries,”

they would have been unconstitutional. Cherry Hill,

505 F.3d at 35 (holding that these characteristics

distinguished statutes at issue in Granholm from

those requiring face-to-face transactions). The cases

do not, as defendants suggest, endorse a_ special

interest in “close proximity” transactions.

In a related argument, defendants assert that

out-of-state wine retailers’ inabilhty to ship to

consumers in Texas is a mere practical consequence

of their remoteness from the state, rather than a

result of discrimination. The court disagrees.

Although an inability to sell wine to Texas

consumers 1n face-to-face transactions could be called

a practical consequence of a remote location, nothing

about a remote location makes it practically

impossible to sell by mail or common carrier. The

inability to ship by mail or common carrier is in fact

a legal consequence of plaintiffs’ remoteness from the

state—one that warrants heightened scrutiny under

the dormant Commerce Clause.

D

Because plaintiffs have established that the

challenged provisions of the Code _ discriminate

against interstate commerce, the “burden [now shifts

to] the State to show that the discrimination is

87a

demonstrably justified.”. Granholm, 544 U.S. at 492

(emphasis and internal quotation marks omitted).

Defendants must demonstrate that the challenged

statutes advance a “legitimate local purpose that

cannot be adequately served by reasonable

nondiscriminatory alternatives.” J/d. at 489 (internal

quotation marks omitted). “The [c]ourt [may uphold]

state regulations that discriminate against interstate

commerce only after finding, based on concrete

record evidence, that a State’s nondiscriminatory

alternatives will prove unworkable.” Jd. at 492-93.

I

Defendants contend that requiring the in-state

presence of wine retailers is necessary for protecting

Texas’ interest in conducting on-site inspections of

retailer premises. Acknowledging that the Supreme

Court found this interest to be insufficient to justify

the discrimination at issue in Granholm, id. at 492,

defendants maintain that the present case is

distinguishable because they have developed a

superior factual record. The court disagrees.

Although the Granholm Court did cite the states’

inability to provide a concrete record as a reason for

rejecting the proposition that direct shipping

circumvents the laws governing underage drinking,

it did not rely on this reason to reject the states’

proffered interest in on-site inspections. Compare id.

at 490 (“Without concrete evidence that direct

shipping of wine is likely to increase alcohol

consumption by minors, we are left with the States’

unsupported assertions.”) with id. at 492 (“These [on-

site inspection] objectives can also be achieved

through the alternative of an evenhanded licensing

requirement _.... [I]t should be noted that

88a

improvements in technology have eased the burden

of monitoring out-of-state wineries. Background

checks can be done electronically. Financial records

and sales data can be mailed, faxed, or submitted via

e-mail.”). Summarizing its holding that physical

presence requirements do not advance objectives

unattainable by other means, the Court reiterated

the lack of record evidence, but this statement was

only a “summary” of its previous points and did not

provide additional grounds for rejecting the states’

proffered need for on-site inspections. Jd. at 492.

Even if the states did in fact fail to support their

factual assertions about on-site inspections with an

evidentiary record, the Court appears to have

assumed arguendo the truth of these assertions and

found them to be insufficient nonetheless, because

this was its approach to the unsupported underage

drinking arguments. See td. at 490 (“Even were [the

Court] to credit the States’ largely unsupported claim

that direct shipping of wine increases the risk of

underage drinking, this would not justify regulations

limiting only out-of-state direct shipments.”).

Because defendants do not specify any rationale for

on-site inspections that would not have been

considered by the Court in Granholm or foreclosed by

its reasoning, this justification fails in the present

litigation.

yy

os

The court also finds insufficient the grounds that

Glazer and Republic advance in support of the

discriminatory treatment of out-of-state retailers.

The first of these is that Texas’ ban on direct

shipping is necessary to prevent access by minors to

alcohol. In rejecting this’ justification for

89a

discriminatory direct-shipping laws, the Granholm

Court noted that a “less restrictive step[ ]” to

accomplish this objective would be to “require[ ] an

adult signature on delivery and a label so instructing

on each package.” Jd. at 490-91. Glazer and

Republic contend that this alternative would

sometimes allow minors to gain access to alcohol

(e.g., by a deliveryman’s failure to properly verify

age), but they offer no evidence that the system is

less effective at policing underage drinking than the

other methods. Therefore, preventing access to

alcohol by minors does’ not justify Texas’

discriminatory direct-shipping laws.

Glazer and Republic’s second contention is that

the statutes are necessary for achieving Texas’

revenue-raising interest. But although Glazer and

Republic offer some evidence that Texas has had

difficulty collecting taxes on Internet sales generally,

they adduce no proof that Texas would encounter

difficulty collecting taxes in the context of alcohol

sales, where it “could protect itself ... by requiring a

permit as a condition of direct shipping.” Granholm,

544 U.S. at 491 (citing this __less-restrictive

alternative as reason to reject states’ revenue-raising

justification). The absence of such evidence is fatal

to their argument.

Glazer and Republic contend, third, that a ban on

direct shipping by out-of-state wine retailers is

necessary to preserve Texas’ three-tier system,

because lifting the restriction would allow wine to

enter Texas that had not been funneled through a

TABC-licensed wholesaler. As the court explains

infra at § VI(A)(3), however, Texas’ can

constitutionally require that wine sold and shipped

90a

to Texas consumers be purchased from a Texas-

licensed wholesaler. The court therefore disagrees

that the sale and direct shipment of wine would

necessarily allow out-of-state retailers to bypass the

three-tier system.!9

19 The court recognizes that this conclusion differs from the

recent decision in Arnold’s Wines, Inc. v. Boyle, 515 F. Supp. 2d

401 (S.D.N.Y. 2007). The Arnold's Wines court concluded, based

on the Twenty-first Amendment alone, and without conducting

a dormant Commerce Clause analysis, that New York had the

right to preclude out-of-state wine retailers from selling,

delivering, and transporting wine directly to New York

consumers because the ban was “an integral part of the three-

tier system upheld by the Supreme Court in Granholm.” Id. at

413-14. The court stated, in pertinent part, that “[b]ecause in-

state retailers are the last tier in the State’s three-tier system,

plaintiffs’ challenge to the[law’s] provisions blocking out-of-

state entities from obtaining licenses to compete at this tier is

clearly an attack on the three-tier system itself.” /d. at 411.

The court respectfully disagrees with Arnold’s Wines,

concluding, inter alia, that it is based on a misreading of

Granholm, and that it elevates a state’s rights under the

Twenty-first Amendment to a level that improperly supersedes

the dormant Commerce Clause. Granholm states, for example,

that “State policies are protected under the Twenty-first

Amendment when they treat liquor produced out of state the

same as its domestic equivalent.” Granholm, 544 U.S. at 489.

The laws in question in Arnold’s Wines do not appear to satisfy

that requirement. Arnold's Wines, 515 F. Supp. 2d at 402

(addressing laws “that reserve to in-state retailers the exclusive

right to sell, deliver, and transport wine directly to New York

consumers’). Moreover, as the court explains in today’s

opinion, a state can treat in-state and out-of-state entities on

equal terms and still preserve its three-tier system. Therefore,

it does not follow that allowing out-of-state retailers to compete

in a state’s domestic market “is clearly an attack on the three-

tier system itself.” Jd. at 411.

For the foregoing reasons, the court concludes

that defendants have failed to establish that Texas’

discriminatory direct-shipping laws are necessary to

achieve a legitimate state interest. The court

therefore holds that the following Code provisions

are unconstitutional as applied to out-of-state wine

retailers: Tex. Alco. Bev. Code §§ 22.0329, 24.03,

54.12, and 107.07(f).2!

i

Based on the foregoing, it follows that the

challenged Texas citizenship requirements?2? are also

unconstitutional as applied to retailers. If Texas

cannot constitutionally condition wine retailer direct-

shipping rights on a physical presence within the

state, it cannot condition qualification for TABC

permits on establishing citizenship in Texas. It also

follows that Texas cannot prohibit consumers from

purchasing wine from out-of-state retailers who

comply with the Code and TABC regulations.

Accordingly, the challenged ban on consumer

imports of wine embodied in §§ 107.05(a) and

107.07(a) is also unconstitutional.

20 This holding applies to pre-S.B. 1229 law, as well.

21 The Siesta Village plaintiffs include § 110.053 in their

hst of challenged statutes, but the court neither perceives, nor

do plaintiffs identify, any defect in this provision.

22 These requirements are set out in Tex. Alco. Bev. Code §§

6.03, 11.46(a)(11), 11.61(b)(19), 24.01(c), and 109.53. Sections

24.0l(c) and 109.53 are implicated with respect to the

provisions that incorporate a citizenship requirement.

92a

VI

The court now decides the scope of the relief to

which plaintiffs are entitled.

A

Plaintiffs request that the Agreed Injunction be

made permanent, or that the court substitute its own

injunction giving the retailer-plaintiffs the right to

sell and ship wine directly to consumers within

Texas. Defendants respond that this relief would

improperly allow the retailer-plaintiffs to do business

in the state without obtaining TABC permits or

complying with the requirement that they purchase

wine from a TABC-licensed wholesaler. The Wine

Country plaintiffs maintain that this is justified

because there are no TABC permits available to out-

of-state retailers, the Code’s wholesaler-purchase

requirement is inapplicable to out-of-state retailers,

and, if the wholesaler-purchase requirement in fact

applies to out-of-state retailers, it is

unconstitutional.

1

Texas law requires that any person who seeks to

sell alcohol within the state must first obtain a

TABC license or permit. See Tex. Alco. Bev. Code

§§ 6.01, 11.01. The Wine Country plaintiffs contend

that it would be unconstitutional to apply this

requirement to them because there are no permits

available to out-of-state retailers. They reason that,

because the Texas Legislature has not created a

special licensing scheme for out-of-state retailers, as

it recently has done for out-of-state wineries, see Tex.

Alco. Bev. Code §§ 54.01-54.12 (effective May 1,

2005), out-of-state retailers are excluded from

93a

participating in Texas’ three-tier system. The court

disagrees.

The State’s mechanism for excluding out-of-state

wine retailers from the Texas market is found in the

unconstitutional citizenship requirements. Because

the court is enjoining enforcement of the citizenship

requirements against out-of-state wine retailers, no

enforceable Code provisions prevent the retailer-

plaintiffs from obtaining TABC permits. The fact

that the remaining, constitutional components of the

Texas regulatory scheme may be somewhat awkward

when applied to out-of-state wine retailers does not

require that the Texas Legislature enact a separate

system that regulates them. Accordingly, the court

holds that the retailer-plaintiffs must first obtain

TABC permits before selling and shipping wine to

consumers within Texas.

2

The court also holds that the retailer-plaintiffs

must purchase from TABC-licensed wholesalers and

wineries the wine they sell to consumers within

Texas. This requirement is plainly imposed by the

Code. See Tex. Alco. Bev. Code Ann. §§ 22.01 and

24.01 (Vernon 2007). The Wine Country plaintiffs

contend that this requirement does not apply to

them. They emphasize that it has never been

enforced against out-of-state retailers, and they

assert that the made-for-litigation interpretation of

the law that defendants now advance is entitled to

no deference under principles articulated in Bowen v.

Georgetown University Hospital, 488 U.S. 204, 212-

13 (1988), and Thompson v. Goetzmann, 337 F.3d

489, 502 (5th Cir. 2003).

94a

Bowen and Thompson do not affect the court’s

conclusion that the wholesaler-purchase requirement

applies to the retailer-plaintiffs. The court is not

deferring to the TABC’s interpretation of the Code.

It is itself interpreting unambiguous § statutory

provisions. The court therefore concludes that the

Code requires the retailer-plaintiffs to purchase from

TABC-licensed wholesalers the wine they seek to sell

at retail to consumers in Texas.

_

—)

The Wine Country plaintiffs contend that the

requirement that they purchase wine for resale from

Texas-licensed wholesalers is unconstitutional

because it effectively requires their physical presence

in Texas. They maintain that California law forbids

them from receiving shipments of alcohol from out-

of-state wholesalers into the state, which means that

to comply with ‘Texas’ wholesaler-purchase

requirement, they must establish a ‘Texas branch

office to receive shipments. The court rejects these

arguments.

A decision lke today’s’ that invalidates

components of a state’s direct-shipment laws does

not necessarily call] into question the

constitutionality of the state’s three-tier system. See

Granholm, 544 U.S. at 488. The Supreme Court

noted in Granholm that it had “previously recognized

that the three-tier system itself is ‘unquestionably

legitimate.” Jd. at 489 (citing North Dakota ov.

United States, 495 U.S. 423, 432 (1990), and id. at

447 (Scalia, J., concurring in judgment)). It cited in

support of this conclusion Justice Scalia’s

concurrence in North Dakota, in which he wrote:

“The Twenty-first Amendment ... empowers North

95a

Dakota to 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. And

the Court concluded that “State policies are

protected under the Twenty-first Amendment when

they treat liquor produced out of state the same as

its domestic equivalent.” Granholm, 544 U.S. at 489.

In requiring that wine retailers purchase their

wine for resale from Texas-licensed wholesalers, the

Code does not treat in-state retailers more favorably

than it does out-of-state retailers. See Tex. Alco.

Bev. Code Ann. §§ 22.01 and 24.01 (Vernon 2007). In

fact, the Code does not contemplate that there will be

any wine sales by out-of-state retailers to consumers

in Texas. Although a state may not exempt in-state

interests from the strictures of its three-tier system

while continuing to require out-of-state interests to

comply with it, see, e.g., Granholm, 544 U.S. at 489,

this is not the case here. As a result of today’s

decision, out-of-state retailers are now eligible to

obtain permits to sell and ship wine to Texas

consumers.” As permittees, they become subject to

Code provisions that are part of the three-tier system

and that make no distinction between out-of-state

and in-state entities.

Nor can the Wine Country plaintiffs avoid this

result based on complaints about the _ practical

consequences of imposing the wholesaler-purchase

requirement. If, as is undoubtedly true, Texas can

“funnel sales through the three-tier system,” id., it

23 The Agreed Injunction had this effect, of course, but it

afforded only temporary relief.

96a

can impose the wholesaler-purchase requirement of

that system on both in-state and out-of-state wine

retailers. In fact, the Fourth Circuit suggested in

Beskind v. Easley, 325 F.3d 506 (4th Cir. 2003), that

one way to remedy a scheme that discriminated

against out-of-state wine manufacturers--who were

required to sell through the three-tier system when

in-state wine manufacturers were not-—-was for the

state to “require in-state wines to pass through the

same three-tiered scheme that all other wines must

pass through.” Jd. at 515. This is the effect of the

Code’s wholesaler-purchase requirement in

combination with today’s decision enabling out-of-

state wine retailers to sell to consumers in Texas: the

wholesaler-purchase requirement applies to in-state

and out-of-state interests alike. See Granholm, 544

U.S. at 489 (“State policies are protected under the

Twenty-first Amendment when they treat liquor

produced out of state the same as its domestic

equivalent.”). The ‘Texas wholesaler-purchase

requirement is therefore constitutional as applied to

out-of-state wine retailers who desire to sell and ship

wine to Texas consumers.

4

The Wine Country plaintiffs also argue that

Texas does not require that “all” liquor pass through

the three-tier system, but has instead made an

exception for direct sales by wineries to consumers.

Assuming arguendo that, at some point, exceptions

.o the three-tier system—even if equally applied to

out-of-state interests—can become _ sufficiently

expansive that they cause the State to lose its right

to regulate through that system, this is not such a

case. The limited exception afforded under the Code

97a

for direct sales by wineries does not permit the

conclusion that Texas has relinquished its right to

regulate the vast remainder of wine sales through its

three-tier system.

The Fourth Circuit’s decision in Brooks lends

support to this conclusion.”4 In affirming the state’s

right to employ the three-tier system, the court

repeatedly acknowledged the existence of other

exceptions to that arrangement, including one for

direct sales to consumers by wine producers. Brooks,

462 F.3d at 345, 349, 350 n.2 (ma). op.); id. at 352 n.3

(Niemeyer, J., concurring). Significantly, the

existence of these exceptions did not affect the court’s

conclusion that Virginia could require that all other

alcohol sales be made through the three-tier system.

The state’s interest in using that system apparently

had not been undermined.

The court therefore concludes that Texas has not

relinquished its interest in the three-tier system by

making a limited exception for direct sales by

wineries.

D

Finally, plaintiffs’ arguments criticizing the

three-tier system are—to the extent the regime is

constitutional—more appropriately directed to the

Texas Legislature. See, e.g., Ewing v. California, 538

24 Brooks was written by Judge Niemeyer. Judge Traxler

concurred in the opimon except as to Part III(B), «und he

concurred in the judgment. Judge Goodwin concurred in Parts

I, Il, and V, and dissented from Parts III and IV. Brooks, 462

F.3d at 344.

98a

U.S. 11, 28 (2003) (“|Federal courts] do not sit as a

‘superlegislature’ to second-guess |state] policy

choices.”). Similarly, it is not controlling that some

of the policy rationales for making exceptions for

wineries might support a decision to craft similar

exceptions for retailers, because plaintiffs do not

contend that they are constitutionally entitled to the

same treatment as are wine producers.

B

Because the retailer-plaintiffs may not sell and

ship wine to Texas consumers without first obtaining

TABC permits or purchasing their wine from a

Texas-licensed wholesaler, they are not entitled to

injunctive relief that enables them to circumvent

these requirements. The court must instead fashion

a remedy that relieves them only from complying

with the unconstitutional provisions of the Code.

Accordingly, the court enjoins enforcement of the

Code’s Texas citizenship requirements as applied to

out-of-state wine retailers, and it enjoins

enforcement of the ban on imports as applied to

Texas consumers who seek to purchase wine from

out-of-state retailers, and as applied to entities who

would be barred by its provisions from delivering

wine to Texas consumers.

As to the direct-shipping laws, there is some

dispute about the appropriate scope of the injunction.

Plaintiffs request that the court enjoin enforcement

of only those provisions that prohibit out-of-state

retailers from shipping wine to Texas consumers. By

contrast, Glazer and Republic argue that the court

should nullify the direct-shipping rights currently

enjoyed by in-state retailers, rather than extending

those benefits to out-of-state retailers. Defendants,

99a

for their part, appear to prefer a remedy that would

allow out-of-state interests to sell and ship wine only

to a single Texas county.

Two basic principles guide the court’s resolution

of this dispute. First, mindful of its institutional

role, the court must resist invitations to engage in

legislative policymaking. See, e.g., Hwing, 538 U.S.

at 28 (“[Federal courts] do not sit as a

‘superlegislature[.]”); Dickerson, 336 F.3d at 408-409

(“We must decline the ... invitation to assume the

mantle of super legislature, actively rewriting

substantial portions of the [Code] under the guise of

validating a Commerce’ Clause _ challenge.”)

(invalidating statutory regime that afforded direct

sale and shipment rights exclusively to in-state

wineries).

Second, discriminatory’ direct-shipping laws

should be cured by extending rights to out-of-state

retailers rather than by increasing restrictions on in-

state retailers. See Dickerson, 336 F.3d at 407-09

(enjoining enforcement of statutory provisions that

denied shipping rights to out-of-state wineries rather

than eliminating provisions that granted such rights

to in-state wineries) (“[T]he extension of benefits, not

the extension of burdens—is [the goal] inherent in a

claim under the Commerce Clause..... [A] Commerce

Clause claim can only be redressed in the form of

eliminating discriminatory restrictions that have

been imposed on out-of-state interests.”) (emphasis

in original)).?5

25 Glazer and Republic maintain that the court should

follow the Fourth Circuit’s contrary holding in Beskind, 325

100a

Applying these principles, the court enjoins

enforcement of §§ 54.12 (generally forbidding out-of-

state entities from shipping to Texas consumers) and

107.07(f) (same) as applied to out-of-state wine

retailers. It also enjoins, as applied to out-of-state

wine retailers, the enforcement of the in-county

shipping limitation found in §§ 22.03 and 24.03.26

The Agreed Injunction is hereby dissolved and is

replaced by the more limited injunctive relief set out

in the judgment filed today.27

F.3d at 519. They do not, however, provide any basis for

distinguishing Dickerson, which is binding in this circuit.

26 While the court recognizes that enjoining §§ 22.03 and

24.03 only as to out-of-state wine retailers results in statewide

shipping rights for out-of-state retailers without a concomitant

expansion of statewide shipping rights for in-state wine

retailers, the in-county shipping lhmitation has not been

deemed unconstitutional as applied to Texas retailers, so it

would be improper for the court to enjoin its enforcement as to

them. See Dickerson, 336 F.3d at 407 (enjoining enforcement of

unconstitutional direct-shipping laws only as applied to out-of

state wineries, which was the only application held to be

unconstitutional); United States v. Faasse, 265 F.3d 475, 487

n.10 (6th Cir. 2001) (recognizing that wholesale invalidation of

statute “is reserved only for when there are no set of

circumstances in which the statute’s application would be

constitutional”).

9g - - - - . - 7

27 In view of this disposition, the court denies intervenors

April 26, 2007 motion to dissolve the Agreed Injunction as

moot.

10la

Vil

Finally, the court turns to Glazer’s and Republic’s

counterclaims against plaintiffs and cross-claim

against Steen.

A

Glazer’s and Republic’s counterclaims and cross-

claim consist of three counts. In count I, intervenors

complain that the Agreed Injunction and plaintiffs’

requested relief violates Texas’ three-tier system,

compromises Glazer’s and _ Republic’s’ business

interests and customer relationships, gives an

unregulated class of out-of-state importers an unfair

competitive advantage, and creates a discriminatory

preference for wine over other alcoholic beverages.

They allege that they are being deprived of their

right and privilege to engage in interstate commerce

under the three-tier system. And they aver that the

Agreed Injunction violates their rights under the

Commerce Clause and the Equal Protection Clause

of the Fourteenth Amendment by preferring one

form of interstate commerce over another, and by

depriving them of the evenhanded and

nondiscriminatory application and administration of

state law.

In count II, Glazer and Republic request a

judgment declaring the rights and duties of

plaintiffs, defendants, and intervenors. They also

ask the court to declare that the challenged Code

sections are constitutionally valid provisions of the

three-tier system, that out-of-state retailers must

purchase alcohol from Texas in-state, licensed

wholesalers, and that enforcement of these

requirements against out-of-state retailers like

plaintiffs is constitutional.

102¢

In count III, intervenors aver that any different

treatment imposed by Texas law on the manner in

which wine is sold by licensed retailers to Texas

consumers is constitutional and/or immunized from

Commerce Clause scrutiny by the Twenty-First

Amendment and/or the Webb-Kenyon Act, 27 U.S.C.

§ 122. They request that, if the court determines

that any portion of the Code is unconstitutional, it

limit the remedy to eliminating only those elements

that constitute unconstitutional discrimination,

while expressly declaring the continuing validity of

the other Code provisions that plaintiffs challenge.

In their prayer for relief, Glazer and Republic

request, in pertinent part,?® that the court deny the

relief that plaintiffs request, and that it enter

judgment against plaintiffs, vacate the Agreed

Injunction, and declare that the challenged Code

provisions are constitutional and that alcohol must

pass through a licensed, in-state Texas wholesaler

before it can be sold at retail to Texas consumers.

Alternatively, they ask that, if the court determines

that the Code is in any respect unconstitutional, it

enter limited injunctive relief that addresses these

infirmities rather than order the expansive remedies

that plaintiffs seek.

B

In the exercise of its discretion, the court

dismisses Glazer’s and _ Republic’s claims for

declaratory judgment relief. Because, in the context

28 An example of the other relief they request is a right of

limited discovery in this litigation.

103a

of plaintiffs’ claims, the court has fully considered

and addressed the issues and arguments that Glazer

and Republic present, addressing the claims anew in

the context of a declaratory judgment counterclaim

and cross-claim would be wholly redundant. The

court therefore denies the

This text is long and has been trimmed here. Open the source document for the complete record.