United States: Implications Of The Supreme Court's Tennessee Retailers Decision

As virtually everyone in the US alcohol beverage industry knows, last week the US Supreme Court handed down its opinion in Tennessee Wine and Spirits Retailers Assn. v. Thomas, S.Ct. No. 18-96 (June 26, 2019). Now that over a week has passed since the release of that decision, it's time to reflect on what it means and what is coming next.

1. Background

Tennessee law imposes a two-year durational residency requirement on applicants for a license to operate a retail liquor store. (Two additional provisions struck by the lower courts—one ostensibly requiring 10 years of residency to renew a license and the other mandating that every shareholder of a corporate applicant be a Tennessee resident—were not defended by any party and therefore not at issue in the Supreme Court.) Two applicants that did not meet the residency requirements, one an affiliate of US retail giant Total Wine, sought licensing. The trade group for Tennessee's liquor retailers, the Tennessee Wine and Spirits Retailers Association, sought to block the licensing of these erstwhile competitors, prompting the state to seek judicial review of the state's residency requirements. Both the District Court for the Middle District of Tennessee and the Sixth Circuit Court of Appeals found the two-year residency requirement (as well as the 10-year renewal requirement and corporate shareholder rule mentioned above) unconstitutional under the "dormant" Commerce Clause.

For legal background, recall that federal courts since the 1800s have interpreted the Constitution's Commerce Clause, which gives Congress the power to regulate interstate commerce, as having a "dormant" component. In other words, even where Congress has not acted, the Commerce Clause places limits on states' authority to regulate economic activity in interstate commerce. Today, these limitations generally mean that:

  1. A state cannot discriminate against out-of-state interests in favor of in-state interests;
  2. A state cannot act in ways that effectively regulate conduct occurring outside of the state's borders; and
  3. A state cannot enact neutral laws that place an unreasonable burden on interstate commerce.

In the case of state laws regulating alcohol, however, Section 2 of the Twenty-first Amendment has been interpreted as giving state laws some additional protection from dormant Commerce Clause challenge under points a and c above. Exactly how much protection lies at the center of the Tennessee Retailers case.

Last week the Supreme Court held that the Twenty-first Amendment did not shield Tennessee's two-year residency requirement from dormant Commerce Clause scrutiny. Having rejected the blanket immunity argument advanced by the Tennessee Wine and Spirits Retailers Association and their state government allies, the Court held that the residency requirement was not justified as a public health or safety measure. Thus, the Supreme Court affirmed the Sixth Circuit's earlier decision finding the residency requirement unconstitutional.

2. What Was Not Surprising

The outcome: Anyone who attended the Tennessee Retailers oral argument in January came away feeling that the Tennessee law was in deep trouble. Moreover, counting noses, the 7-2 outcome was not surprising.

A narrow decision: Courts, including the Supreme Court, work incrementally in advancing the law through the lens of the facts and circumstances before them. While many observers in the press and the industry hoped for some sweeping pronouncement, the fact that the Tennessee Retailers case did not deliver should not have come as a big surprise. Moreover, at oral argument, Justice after Justice expressed the desire to decide the case without necessarily deciding other important issues, such as the legitimacy of an in-state presence requirement, which the Court expects to be tested in the future.

3. Surprises

No concurrences: While we expected a 7-2 or 8-1 decision holding that the Tennessee residency requirement is unconstitutional, we also expected a majority fractured by different approaches to arrive at that result. Instead, Justice Alito's opinion seemed to reconcile the various approaches of the Justices, allowing the majority to speak with unanimity. In doing so, Justice Alito departs from the textualist approach he is often ascribed as favoring (some say incorrectly), kicking off the Court's analysis of the Twenty-first Amendment by rejecting total reliance on the Amendment's text:

Although the interpretation of any provision of the Constitution must begin with a consideration of the literal meaning of that particular provision, reading §2 to prohibit the transportation or importation of alcoholic beverages in violation of any state law would lead to absurd results that the provision cannot have meant to produce. Tenn. Retailers, Slip. Op., Opinion of the Court at 11.

Justice Gorsuch dissents: Based on the questions asked by Justice Gorsuch at oral argument, we expected him to land on the side of upholding the Sixth Circuit and striking down Tennessee's durational residency requirement. We expected to find Justice Thomas in dissent, perhaps joined by Chief Justice Roberts (who said very little during oral argument).

4. The Law Going Forward

The Tennessee Retailers case emphatically rejects the proposition that any category of state laws is immune from dormant Commerce Clause scrutiny. In doing so, it follows a path that started with Hostetter v. Idlewild Bon Voyage Liquor Corp. (1964) and ran through a host of later cases, most importantly Bacchus Imports, Ltd. v. Diaz (1984) and Granholm v. Heald (2005). Before Tennessee Retailers, federal courts were split on whether the dormant Commerce Clause applied to state laws regulating wholesalers and retailers. Last week the Supreme Court emphatically said "yes."

The Court also provided broad outlines for testing state laws regulating alcohol in the future. This analysis asks whether the state law regulates the health and safety risks posed by alcohol, requiring a case-by-case analysis with "each variation . . . judged based on its own features." Tenn. Retailers, Slip Op., Opinion of the Court at 28. What a state cannot do is "adopt protectionist measures with no demonstrable connection to [public health and safety] interests." Id. at 32.

The Court's language clearly requires some affirmative showing (it must be "demonstrable") that a challenged law advances public health and safety. So what must a state do to demonstrate whether the state law represents a legitimate measure? For starters, "'mere speculation' or 'unsupported assertions' are insufficient to sustain a law that would otherwise violate the Commerce Clause." Id. at 33 (quoting Granholm). Moreover, the Court appears to require "concrete evidence" to show that a measure promotes public health and safety. Id. Finally, the Court appears to require "evidence that nondiscriminatory alternatives would be insufficient to further [public health and safety] interests." Id.

5. What It Means and Next Frontiers

The Court appears to have crafted an enduring test for evaluating state alcohol laws under the dormant Commerce Clause. But, per the Court, this necessarily requires a case-specific analysis with each challenged law "judged based on its own features." So, further developments will come on a case-by-case basis.

Here, substantial questions arise:

  • How much "concrete evidence" must a state produce to justify a given law?
  • While "mere speculation" will not suffice, will courts give any weight to positions that have intuitive appeal?
  • What must a state do to show that no non-discriminatory alternatives exist?

The answer to each one of these questions will most likely vary from court to court and case to case.

Some, including the Court's dissent, have suggested that Tennessee Retailers eviscerates Section 2 of the Twenty-first Amendment. See Tenn. Retailers, Slip Op., Gorsuch, J., dissenting at 14 ("it's hard not to wonder what's left of Webb-Kenyon and §2"). This somewhat overstates the result, and the better answer is found in other areas of constitutional law. Today, courts apply three different levels of judicial scrutiny, depending on the constitutional provision at issue and the nature of the challenged law. The most rigorous level of judicial scrutiny is generally labeled "strict scrutiny." For example, laws regulating political speech, artistic expression and other forms of "pure" speech are subject to strict scrutiny. Only the most compelling showing of a legitimate need by the government and a complete lack of alternatives aside from suppressing speech will save the law. In practice, almost no laws challenged under the First Amendment's strict scrutiny standard survive.

On the other end of the spectrum lies the "rational basis" standard. For Equal Protection Clause challenges of laws not implicating a "suspect class" (like race or gender), for example, courts only apply rational basis scrutiny. This forgiving standard merely asks whether the government or the reviewing court itself can come up with some plausible rationale for why a law makes a legitimate distinction. No evidentiary showing is required. The Tennessee Retailers opinion requires evidence to support a state's public health and safety rationale, so the contemplated analysis is clearly more rigorous than rational basis scrutiny.

Which leaves "intermediate scrutiny"—a concept used to review laws that regulate "commercial speech" and are challenged under the First Amendment. While intermediate scrutiny requires the government to produce evidence to justify a challenged restriction, courts ostensibly demand a lower level of proof when applying intermediate scrutiny when compared to cases applying strict scrutiny. Similarly, the examination of alternatives presumably is less exacting under intermediate scrutiny than under strict scrutiny.

While not articulated in this way by the Court, it seems Tennessee Retailers and its immediate predecessor cases (especially Granholm) have created a type of intermediate scrutiny test for state laws regulating alcohol and challenged under the dormant Commerce Clause. Notably, the Tennessee Retailers majority points out that neither the parties nor the dissent would have defended the residency requirement in question if the law did not regulate alcohol. See Tenn. Retailers, Slip Op., Opinion of the Court at 10. The implication is that courts examining whether a law advances a public health and safety interest and lacks non-discriminatory alternatives should be somewhat less demanding of the state than they would if the law did not involve alcohol. Such an analysis, then, appears to represent the dormant Commerce Clause equivalent of intermediate scrutiny.

6. Conclusion

The big question on the minds of many is whether future courts will strike down laws prohibiting out-of-state retailers and wholesalers from exercising the same rights and privileges granted to in-state retailers and wholesalers. The outcome of such future cases will hang, after Tennessee Retailers, on the quality and quantity of the evidence put forth by both sides of the case. In short and as expected, Tennessee Retailers did not address the all-important issue of whether it would result in (to borrow from Justice Gorsuch at oral argument) the "Amazon of liquor." That is a question for another day.

Implications Of The Supreme Court's Tennessee Retailers Decision

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