Antitrust Law Daily Tennessee’s two-year durational residency requirement for retail liquor licenses unconstitutional
News
Wednesday, June 26, 2019

Tennessee’s two-year durational residency requirement for retail liquor licenses unconstitutional

By Peter Reap, J.D., LL.M.

The state’s requirement that applicants for an initial retail liquor license must have resided in the state for the prior two years violates the Commerce Clause and is not saved by application of Section 2 of the 21st Amendment.

Tennessee’s two-year durational residency requirement that applies to retail liquor store license applicants violates the Commerce Clause of the U.S. Constitution by blatantly favoring the state’s residents without a significant relationship to public health and safety, and the requirement is not saved by Section 2 of the Twenty-first Amendment, according to the U.S. Supreme Court in a 7-2 opinion authored by Justice Samuel Alito. In a case brought by petitioner Tennessee Wine and Spirits Retailers Association, a ruling by the U.S. Court of Appeals in Cincinnati was affirmed. Related rulings by the appellate court in a case that struck down more stringent requirements that an applicant for renewal of a retail liquor license must reside in the state for 10 consecutive years and providing that a corporation cannot obtain a license unless all of its stockholders are residents, were not considered by the High Court. Justice Neil Gorsuch authored a dissent, joined by Justice Clarence Thomas (Tennessee Wine and Spirits Retailers Association v. Thomas, June 26, 2019, Alito, S.).

Dormant Commerce Clause. The dormant Commerce Clause restricts state protectionism by providing that a state law that discriminates against out-of-state goods or nonresident economic actors may only be sustained on a showing that it is narrowly tailored to advance a legitimate local purpose, the Court noted. Tennessee’s two-year durational-residency requirement plainly favors Tennesseans over nonresidents, and the Association does not defend that requirement under the standard that would be triggered if the requirement applied to a person wishing to operate a retail store that sells a commodity other than alcohol.

Section 2 of the 21st Amendment. Section 2 of the 21st Amendment provides that: "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." The Supreme Court’s modern precedents have rejected the view that Section 2 shields all state alcohol regulation—including discriminatory laws—from any application of dormant Commerce Clause doctrine, the Court observed. Instead, the modern Court has invalidated state alcohol laws aimed at giving a competitive advantage to instate businesses. Most recently, in Granholm v. Heald, 544 U. S. 460 (2005), the Court struck down a set of discriminatory direct-shipment laws that favored in-state wineries over out-of-state competitors.

"Although it concedes (as it must under Granholm) that §2 does not give the states the power to discriminate against out-of-state alcohol products and producers, the Association" argued that a different rule applies to state laws that regulate in-state alcohol distribution. There is no sound basis for such a distinction, the Court reasoned.

The Association contended that even if the Granholm Court did not explicitly limit its holding to products and producers, the Court implicitly did so when it rejected the argument that its analysis would call into question the constitutionality of state laws setting up three-tiered alcohol distribution systems. Such a reading of Granholm, also advanced by the dissent, reads too much into Granholm’s discussion of the three-tiered model, the Court explained. Moreover, what was at issue in this case, Tennessee’s durational residency requirement for new applicants for liquor store licenses, was not the basic three-tiered model of separating producers, wholesalers, and retailers. Such a requirement was not an essential feature of a three-tiered scheme.

The Association argued that discriminatory distribution laws like durational residency requirements were around long before Prohibition and were adopted by many states following the ratification of the 21st Amendment. It argued that history shows that Section 2 was intended to broadly exempt all in-state distribution laws from the scope of the dormant Commerce Clause. This argument was without merit for several reasons, the Court determined. First, it did not take into account the overly expansive interpretation of Section 2 that occurred immediately after its adoption. More recent cases of the Supreme Court have rejected this interpretation of Section 2 and the argument inferred too much from laws that have never been tested in this Court. Nor have states been historically given a free hand to police alcohol within their borders. Section 2 "allows each state leeway to enact the measures that its citizens believe are appropriate to address the public health and safety effects of alcohol use and to serve other legitimate interests, but it does not license the states to adopt protectionist measures with no demonstrable connection to those interests," the Court opined.

Having determined that Section 2’s authority to regulate alcohol sales is not unlimited, the Court concluded that the durational residency requirement at issue expressly discriminates against nonresidents and has at best a highly attenuated relationship to public health or safety. The Association’s attempt to defend the 2-year residency requirement on public health and safety grounds was implausible on its face. It claimed that the requirement ensures that retailers are "amenable to the direct process of state courts," but did not explain why this result could not be obtained by readily available alternatives such as designated agents. Its argument that the 2-year requirement gives the state a better opportunity to investigate applicants was similarly without merit because the state could conduct its investigations without requiring applicants to move into the state.

Further, the argument that the requirement promotes responsible alcohol consumption by making retailers more familiar with the communities served by their stores, and this, the Association suggested, will lead to responsible sales practices, was rejected. No evidence was offered that durational-residency requirements foster such practices and there were obvious alternatives that would better serve such a goal such as limiting the amount of licenses and the amount of alcohol that could be sold to an individual, along with more extensive mandated training for managers and employees.

The Association fell far short of showing that Tennessee’s requirement for retail liquor license applicants is valid, the Court held. The predominant effect of the requirement is to protect the Association’s members from out-of-state competition. It violated the Commerce Clause and is not saved by the 21st Amendment.

Dissent. Justice Gorsuch, joined by Justice Thomas, argued that "[s]tates may impose residency requirements on those who seek to sell alcohol within their borders to ensure that retailers comply with local laws and norms" and that the majority’s decision striking down of the Tennessee residence requirement on the basis of discovering "a duty and power to strike down laws like these as unconstitutional" is unwarranted.

Association statement. Following the release of today’s opinion, the Tennessee Wine Association and Spirits Retailers Association released the following statement: "The majority opinion clearly recognized that liquor is a unique commodity in our nation’s history and affirmed the right of states under the 21st Amendment to enact liquor-related regulations for the health and safety of residents, even if those regulations might be impermissible in other industries under the dormant Commerce Clause. The guideposts provided by the decision will be helpful to state legislatures throughout the country as they continue to refine their regulation of liquor."

The case is No. 18–96.

Attorneys: Shay Dvoretzky (Jones Day) for Tennessee Wine and Spirits Retailers Association. Michael Eugene Bindas, Institute for Justice, for Affluere Investments, Inc. Carter G. Phillips (Sidley Austin LLP) and William James Murphy (Zuckerman Spaeder LLP) for Tennessee Fine Wines and Spirits, LLC d/b/a Total Wine Spirits Beer & More. Joseph F. Whalen III, Attorney General's Office, for Russell F. Thomas.

Companies: Tennessee Wine and Spirits Retailers Assn.; Affluere Investments, Inc.; Tennessee Fine Wines and Spirits, LLC

MainStory: TopStory FranchisingDistribution

Back to Top

Interested in submitting an article?

Submit your information to us today!

Learn More

Antitrust Law Daily: Breaking legal news at your fingertips

Sign up today for your free trial to this daily reporting service created by attorneys, for attorneys. Stay up to date on antitrust legal matters with same-day coverage of breaking news, court decisions, legislation, and regulatory activity with easy access through email or mobile app.

Free Trial Learn More