The Constitution and the Three-Tier System
Part Seven of a 10-Part Series on the Three-Tier System of Alcohol Distribution
Unlike the first six installments of this series, this one is made available to all readers, not just paying subscribers as it is one of the more important in this series. This is the seventh of a 10-part series examining the Three-Tier System of alcohol distribution in the United States. It is my intent to examine the details, history, impact, politics, and alternatives to this uniquely American set of alcohol laws.
The United States Constitution makes no mention of the Three-Tier System (TTS). It is not outlined in the 18th Amendment that instituted Prohibition nor in the 21st Amendment that ended Prohibition. For that matter, nowhere in federal law is the TTS mentioned. And yet, according to the Supreme Court of the United States, the TTS is “unquestionably legitimate”.
This description of the TTS was first written by Justice Antonin Scalia in 1990 in North Dakota v United States (1990). More importantly, it was quoted as dicta (an observation by the Court that is not central to the primary holdings in a case) in 2005 in the Granholm v Heald Supreme Court case that ruled a state may not allow an in-state entity to ship wine to consumers in that state while prohibiting interests outside the state from also shipping. I want to quote extensively from the Granholm decision because the Court’s use of this “unquestionably legitimate” phrase vis a vis the TTS has been used and is still being used by states and courts to justify various kinds of discriminatory laws:
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.” A State which chooses to ban the sale and consumption of alcohol 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.” 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. The discrimination is contrary to the Commerce Clause and is not saved by the Twenty-first Amendment.”
I want to repeat that when Justice Anthony Kennedy, writing the decision in the Granholm case, quoted Scalia’s “unquestionably legitimate” description of the TTS from an earlier case, he was not answering the question, may a state discriminate against out-of-state alcohol companies or is the TTS constitutional? It was, for lack of a better description, an “aside.” However, consider how 17 years later that “aside” is being used in courts. The following is from a North Carolina lawsuit that challenges that state’s ban on wine shipments from out-of-state retailers to North Carolina residents while in-state retailers may ship to them. Here is the Fourth Circuit Court of Appeals explaining that the North Carolina case at hand is no different from an earlier and similar case in Virginia:
“a challenge to a Virginia statute that permitted only in-state retailers to sell alcoholic beverages to consumers was nothing different than an argument challenging the three-tier system itself. That challenge was foreclosed by the Granholm decision, which described the three-tier system as unquestionably legitimate….our analysis of North Carolina’s Retail Wine Importation Bar…leads us to conclude that, although the Bar discriminates against interstate commerce, it is nevertheless justified on the legitimate nonprotectionist ground of preserving North Carolina’s three-tier system.”
Put another way, if a state law blatantly and facially discriminates against interstate commerce it is nonetheless constitutional if the law in question is part of the TTS.
Two years ago, the Supreme Court heard another case, Tennessee Wine v Thomas, in which the TTS was again a central concern. In that case, there was a challenge to a Tennessee law that required prospective alcohol retailers to become residents of the state for two years before they could be issued a Tennessee retailer license. As with the Granholm case, Tennessee law was challenged with a claim that the law violated the Commerce Clause of the U.S Constitution and unconstitutionally interfered with interstate commerce.
In defending the law, a trade association of Tennessee retailers claimed that the earlier Supreme Court announcement that the TTS was “unquestionably legitimate” meant the 2-year residency requirement was constitutional and allowed since it was an important part of Tennessee’s TTS. This is what Justice Samual Alito wrote in response to that claim:
“This argument…reads far too much into Granholm’s discussion of the three-tiered model. Although Granholm spoke approvingly of that basic model, it did not suggest that [the 21st amendment] sanctions every discriminatory feature that a State may incorporate into its three-tiered scheme. At issue in the present case is not the basic three-tiered model of separating producers, wholesalers, and retailers, but the durational-residency requirement that Tennessee has chosen to impose on new applicants for liquor store licenses. Such a requirement is not an essential feature of a three-tiered scheme. Many such schemes do not impose durational-residency requirements—or indeed any residency requirements—on individual or corporate liquor store owners.”
Alito’s discussion of the TTS is important. He is narrowing the meaning and definition of the three-tier system. And this brings me to a discussion of interstate wine shipping and the TTS that I want to urge my readers to consider.
Although Alito does not say so, I think it is clear that a TTS is somewhat more than simply separate licensing of producers, wholesalers, and retailers as Alito describes in the above passage. I think the TTS can reasonably be defined to also include the mandate that producers only sell to a state’s wholesalers and only that state’s wholesalers may sell to the state’s retailer.
Do wine shipments from out-of-state really challenge a state’s TTS? And if they do, can a state discriminate against out-of-state retailers by banning their shipments into a state while letting their own retailers ship in the state?
There is nothing in the Constitution or in any state’s laws that bans a consumer in one state from buying wine from a retailer in another state. To suggest such a thing would surprise retailers across the country who regularly sell wine to visitors to their state. Also, no law prevents a consumer in North Carolina, for example, from picking up their phone or opening their laptop and buying a bottle of wine from any retailer in any other state. The question is, may they have that wine shipped to them by the out-of-state retailer once it is purchased?
North Carolina, like most states, requires their retailers to purchase inventory that will be sold in that state from a North Carolina wholesaler. The North Carolina consumer opening their laptop and buying a bottle of wine from a New York retailer has in no way disrupted that North Carolina mandate that its retailers only buy from in-state wholesalers.
The key question, for constitutional purposes, is: does any subsequent shipment of that wine into the state of North Carolina so disrupt its TTS so as to endanger the health and safety of North Carolina residents? This issue of endangering residents’ health and safety is important because the claim made by states (and wholesalers, by the way) is that the TTS protects a state’s legitimate interest in seeing its residents protected from harm.
The answer is apparently not as North Carolina already allows shipments of remotely purchased wine to North Carolina residents from in-state wineries, out-of-state wineries, and in-state retailers. Moreover, these shipments are made all the while North Carolina retailers are still purchasing their inventory from North Carolina wholesalers. And finally, just as Alito noted a number of states do not have residency requirements for retailers yet still maintain a working TTS, a number of other states also allow out-of-state retailers to ship wine into their state while maintaining a functioning TTS.
The point here is that while a TTS is indeed considered “unquestionably legitimate” from a constitutional perspective, the constitutional scope of the TTS is limited too.
This is why it is important to understand exactly what provisions a “three-tier system” encompasses. The 21st Amendment’s grant of power to the states to regulate the sale and distribution of alcohol is not unlimited. Those powers must be balanced against other constitutional provisions, such as the requirement that state laws do not interfere with interstate commerce.
Today, the TTS is implicated in challenges to laws that ban shipments from retailers to consumers. But this will not be the last issue that implicates the TTS that comes before the courts. A number of states allow their retailers to purchase inventory not only from in-state wholesalers but also directly from in-state producers. However, many of those states at the same time ban their retailers from purchasing inventory from out-of-state producers. These laws clearly implicate the Commerce Clause of the Constitution that provides the federal government the power to regulate interstate commerce and by extension prohibits states from regulating interstate commerce. These laws are and will more frequently in the future be challenged.
The intersection of the TTS and the Constitution is primarily concerned with the degree to which the provisions of a TTS advance what courts have viewed as legitimate interests of the state: the health, safety, and welfare of its citizenry. In the face of a challenge to a state alcohol law, courts first ask, does the law advance these legitimate state interests?
The provisions of the TTS, particularly the mandate that producers sell to wholesalers do not in any way, in this writer’s view, advance any of those state interests and they should not be given constitutional protection.
Wholesalers do not make a product safer in their handling of them. Wholesalers do nothing to prevent the sale of alcohol to minors. Wholesalers do nothing to prevent overconsumption by adults. These important concerns are impacted only by producers and retailers.
Moreover, the generally accepted view of the wholesaler mandate is that placing a wholesaler between producers and retailers prevents a return to the evils associated with the pre-prohibition tied house era when producers exerted extraordinary control over retailers and thereby encouraged unsafe and unhealthy sales techniques that led to overconsumption. But in fact, there are various ways this same goal could be accomplished without mandating producers only sell to wholesalers. Between anti-trust laws, tied house laws that prohibit producers and wholesalers from giving anything of value to retailers, and various other allowable state legal mechanisms, the very same health and safety goals could be achieved without requiring the expensive and discriminatory mandate that producers only sell to wholesalers and retailers only purchase inventory from wholesalers.
Yes, the Supreme Court has noted that the TTS is “unquestionably legitimate”. However, this is not a reason to avoid challenging the constitutional legitimacy of the TTS and particularly its mandated use of wholesalers.
For decades following Repeal of Prohibition in the 1930s, federal courts gave extraordinary deference to state alcohol laws with the view that the 21st Amendment provided states with near-unlimited power to pass laws to regulate alcohol. That view changed over time until today.
Today we have the Supreme Court in both the Granholm and Tennessee Wine cases imposing significant limits on state alcohol laws and explicitly backing away from the Court’s earlier deferential view of state alcohol laws. Another such change in the Court’s perspective could occur once again.
Equally important to the court’s view of the TTS in the context of the Constitution is the shape and contour of the modern American marketplace in comparison to the marketplace 90 years ago when Prohibition was repealed.
As we noted in the second installment of this series, the culture, economy, and technology of 1920, when Prohibition first got underway, is closer in character to that of 1820 than it is to 2020. The TTS was put in place in the 1930s to prevent a return to the problems of the turn of the century.
If the justification for state alcohol laws, including those that create a TTS, is the protection of the health, safety, and welfare of citizens, it may be reasonable to conclude that the technology, culture, and economics that define today’s alcohol marketplace are so different than that of the 1920s that the TTS (meant to address the society of the turn of the century) no longer advance health, safety and welfare of citizens today—if they ever did.
It is not unreasonable to imagine a court holding that the inherently discriminatory nature of the TTS is excessively burdensome in comparison to the degree to which the TTS advances the state interest of protecting the health, safety, and welfare of state residents.
What’s true is that to see the TTS removed from its current “unquestionably legitimate” status in the courts, it will take the continual and strategic legal challenge of burdensome, discriminatory and protectionist state laws, despite the prospect of losing those challenges in the near term. It will take a continuous education of the alcohol trade as well as the legal community through writing, speaking and social media to make the case that the TTS is not “unquestionably legitimate.”
This series examining the Three Tier System of alcohol distribution consists of the following parts:
1. The Three-Tier System: What It Is and What It’s Not
2. Background to the Creation of the Three-tier System
3. The Evolution of the Three-Tier System
4. The Three-Tier System, Product Diversity, and Consumer Access to Products
5. Gatekeeping and Rent-Seeking in the Three Tier System
6. The Politics of the Three-Tier System
7. The Constitution and the Three-Tier System
8. Alcohol Control and Regulation Today Around the Three-Tier System
9. Alternatives to the Three-Tier System
10. Concluding Thoughts