Durational-Residency Requirements for Alcohol Beverage Retail Licensees Held Unconstitutional

On February 21, 2018, the US Court of Appeals for the Sixth Circuit published its opinion in Byrd v. Tennessee Wine and Spirits Retailers Association, No. 17-5552. The decision, which includes a partial dissent, affirms a Middle District of Tennessee decision finding that the “durational-residency” (residency) requirements imposed by Tennessee law for alcohol beverage retail licensees are unconstitutional under the “dormant” Commerce Clause.

Tennessee law requires an applicant for a retail license to have been a resident of Tennessee for at least the two-year period immediately preceding the submission of the license application. For corporate license applicants, the two-year requirement applies to any officer, director or stockholder of the corporation. Moreover, to renew such a license the law requires Tennessee residency for at least ten consecutive years.

Two prospective retail applicants that did not meet the two-year residency requirement, notably including the Tennessee affiliate of Total Wine Spirits & Beer, sought licenses. Expecting litigation, the Tennessee Attorney General filed a declaratory judgement action in state court seeking to have the residency requirements declared constitutional. The action was removed to federal court, and the Middle District of Tennessee found the requirements unconstitutional.

Under the so-called “dormant” Commerce Clause, absent congressional authorization state statutes and regulations generally cannot discriminate against out-of-state interests or in favor of in-state interests. The 21^st Amendment acts as a partial limitation of dormant Commerce Clause principles when the issue involves a state law regulating alcohol. While Supreme Court opinions from the 1930s (shortly after passage of the 21^st Amendment) suggested that this exemption of state alcohol laws from Commerce Clause scrutiny was very broad, a series of opinions since then have limited the protection that the 21^st Amendment provides to state laws regulating alcohol.

In affirming the district court decision on appeal, the Sixth Circuit – both majority and partial dissent – presents very thoughtful views on the cutting edge of where the Commerce Clause meets the 21^st Amendment. The majority opinion starts with an overview of Supreme Court guidance, particularly the Bacchus Imports v. Dias (1984) and Granholm v. Heald (2005) decisions. Tackling head-on the current controversy over whether the non-discrimination Commerce Clause principles elaborated in those cases apply only to producers of alcohol beverages and their products, the majority opinion emphatically answers the question as “no.” Endorsing the Fifth Circuit’s 2016 opinion in Cooper v. Tex. Alcoholic Beverage Comm’n (“Cooper II”), the court gives no fewer than six reasons why Commerce Clause non-discrimination principles cannot be limited to producers and products:

1. Nothing in Granholm suggests that it intended to limit the broad non-discrimination principle articulated in Bacchus.
2. In Granholm, the Supreme Court expressed concern over the protection of economic interests across state lines, suggesting that the 21^st Amendment does not automatically immunize state laws concerning wholesalers or retailers.
3. The Supreme Court has emphasized that the 21^st Amendment does not permit discrimination based on state citizenship, indicating that the flow of products alone is not the sole concern of the Commerce Clause in this area.
4. The Supreme Court has reiterated in its most recent case on the subject (Granholm) that the Commerce Clause limits the 21^st
5. The Supreme Court has also stated that there are times when the three-tier system is invalid.
6. The opinion in Granholm did not clearly limit its application to alcohol beverage laws concerning producers or products.

Concluding that the 21^st Amendment does not exempt laws regarding wholesalers and retailers from Commerce Clause scrutiny, the opinion next examines residency in connection with the state powers that the 21^st Amendment sought to protect. The opinion concludes that the 21^st Amendment does not shield Tennessee’s residency requirements from Commerce Clause scrutiny, relying heavily on the Fifth Circuit’s opinion in Cooper II. In following Cooper II, however, the opinion draws an important distinction between residency requirements and location requirements:

[R]equiring retailer- or wholesaler-alcoholic-beverage businesses to be within the state may be essential to the three-tier system, but imposing durational-residency requirements is not, particularly when those durational-residency requirements govern owners.

Without the 21^st Amendment to shield the Tennessee residency requirements, the opinion not surprisingly finds them unconstitutional. With respect to the appropriate remedy, the opinion concludes that the residency requirements in Tennessee’s licensing laws can be “severed” from those laws and struck down without affecting the entire statutory scheme.

Concurring in part and dissenting in part, Judge Sutton opens his opinion with a thoughtful review of the 21^st Amendment in light of history and the development of Commerce Clause and 21^st Amendment case law. He would hold that the two-year residency requirements for new license applicants are constitutional, but agrees with the majority opinion that the ten-year residency requirement for license renewals amounts to nothing other than economic protectionism and therefore is unconstitutional.

In following Cooper II and rejecting the approach of the Second Circuit in the Arnold’s Wines decision (2009) and the Eighth Circuit in the Southern Wine decision (2013), the Sixth Circuit’s Byrd opinion highlights a growing split in the Circuits on the interaction between the Commerce Clause and the 21^st Amendment after Granholm. Eventually, one can expect the Supreme Court to revisit these issues to resolve the split and to provide clear guidance to the federal judiciary. Whether that happens on a (presumably likely) appeal from Byrd or in a future case, the Sixth Circuit’s opinion makes Supreme Court review of the issue incrementally more likely.

But in embracing Cooper II’s distinction between residency and location requirements, the Byrd opinion is not a complete win for those hoping to use Granholm principles to open up state markets to interstate shipping by retailers. As that issue plays out in several federal courts, the Sixth Circuit’s opinion gives significant support to the position of the retailer and consumer plaintiffs, but does not provide the magic bullet they may have hoped for.

In the meantime, Total Wine & More has secured yet another legal victory in its spread across the nation in the face of resistance from local economic interests and their allies in state government.