Sunday, March 30, 2014

Diageo Sues Tennessee, Claims 77-Year-Old Law Is Unconstitutional


On Friday, Diageo filed suit against the director of Tennessee's Alcoholic Beverage Commission (TABC), challenging a 1937 Tennessee law that says distilled spirits manufactured in Tennessee must be stored in Tennessee, either in the county where manufactured or an adjacent county.

Contrary to some inaccurate earlier reporting, Diageo has not and does not intend to store (i.e., age) George Dickel Tennessee Whiskey outside of Tennessee. It has, however, stored some other products (presumably whiskeys) manufactured at the George Dickel Distillery outside of Tennessee at the Stitzel-Weller Distillery in Louisville. On March 20, Dickel was cited by the TABC for violating the 1937 law.

Although the law is 77-years-old, Diageo says this is the first time anyone has been cited for violating it.

Diageo claims the law is unconstitutional under the Commerce Clause. Ordinarily, the Commerce Clause says states cannot favor in-state producers over out-of-state producers who are similarly situated, but the 21st Amendment tends to trump the Commerce Clause when the state can show a compelling interest in orderly commerce in alcohol.

The suit complains that if it is obliged to follow the law, Diageo will have to either build additional storage capacity or move that manufacturing elsewhere, which will cost Tennessee jobs. It would also incur considerable cost moving the removed goods back to Tennessee.

It doesn't say what is being stored at Stitzel but goes to great pains to say it is not George Dickel Tennessee Whiskey. Diageo wants to be clear that it is not aging Dickel outside of Coffee County nor does it intend to.

Insiders say that if Diageo had let it be known this was its real concern before the whole Tennessee Whiskey standards kerfluffle, Tennessee's other distillers -- including Jack Daniel's -- would have been happy to support such a change in the law. Instead Diageo made everybody mad and is now suing to get its way, a harder path that could have been avoided.

Recently, jurisprudence in this area has changed a little bit so Diageo may have a chance of prevailing that it would not have had a few years ago. Even the District Court might find in Diageo's favor if the TABC can't credibly justify the requirement.

20 comments:

Oscar said...

That TN law is about as silly and out-dated as some of those laws in the old west teritories like no pretzels served with beer.

Brian B. said...

Diageo is a corporate giant and has obviously run the numbers. However, it would be interesting to know what the tax rates are per barrel stored in Tennessee vs. Kentucky. Kentucky gets a bad wrap for its excessive rate. Yet, here's a huge corporation willing to pay years upon years of taxes on resting barrels in Louisville instead of just building its own rickhouses in Tennessee.

Carlton said...

Diageo's wanting to use existing warehouse space makes sense from a business perspective. Seeing how they have gone about it, though, I hope they don't get their way. Suggesting they might move George Dickel production to another state is just an empty threat.

Dan said...

Wonder where the old TN whiskey Jefferson's was going to release is being aged. Diageo definitely didn't do anyone any favors with their recent whining, but I'm guessing that won't matter as much as they wind through the court system. Chuck, would you mind posting the complaint?

Chuck Cowdery said...

They aren't threatening to move Dickel. They're threatening to move the 'other' production.

Chuck Cowdery said...

Here is the complaint.

Anonymous said...

Just Diageo being typiacl Diageo. Why anybody would support them by purchasing their "products" or "brands" is beyond me.

Alex said...

No current plans to move George Dickel aging to KY... Their plans could change at any time.

Dan said...

Thanks for the complaint, appreciate it.

markfollette said...

I'm enjoying my first glass of dickel no.8 right now. I prefer the 12, but this is good stuff.

Durham4556 said...

Diageo need to start worrying about their quality instead of worrying about how they can define it.. Good whisky.. no matter what you call it is gonna sell. I don't find more value in calling a whiskey a "Tennessee whiskey".. though calling it a bourbon I do, But I highly doubt what juice Diageo is wanting to make would be a bourbon anyway.

Mark Entel said...

Really interesting, and also quite odd. Imagine if North Dakota had a law that anyone pulling oil out of the ground had to refine it in state?

I wonder if TN will argue this is a condition of receiving approval for running a distillery, as opposed to a regulation on the storage or transport of the alcohol

not an expert on interstate commerce, but my first thought interpretation should not stand. But given how weirdly we allow alcohol to be regulated I could see the courts letting it lie, but they probably shouldn't. 21st amendment allows states to ban alcohol imports, doesn't speak to state authority over restricting exports

Gary Gillman said...

The complaint was well-drafted, both on the merits of the matter and the language itself. Reading this, and without any background in the U.S. laws concerned, I find the complaint fairly persuasive. It seems to come down to, you cannot distill in the state unless you age the product here. If I understand the matter correctly, it is not a question of being permitted to use Tennessee as a geographic indicator. If it was, I could see the logic of requiring the whiskey to be matured locally. But if it is just a question of licensing, interstate commerce does seem affected by the requirements of this state law. If you can age the product elsewhere, are you not, as an out- -of-state producer (in this respect) being discriminated against by being required to build more capacity locally? As well, suppliers of warehouse services outside the state seem disadvantaged in relation to those in the state (although that is not the fact pattern here since Diageo owns all the storage space in question).

I can conceive, though, one good argument against the complaint (apart from any effect of the 21st Amendment): whiskey production is a continuous process, from making the white dog to maturation. And therefore, licensing the activity, even distillation a such, implies control of the full process of whiskey-making - and you can't have control if the product is taken away for completion of processing. Perhaps the requirement of local (county) storage, now extended to the counties next door, originated at a time when inspectors lived in the counties concerned and travel to other parts of the state was not the easy process it is today. But anyway that requirement of itself is neither here nor there.

My inclination though is that Diageo has the better argument, since e.g. it has been and still is the practice to truck white dog from one production locale to another for aging. If the product typically was always aged on the same site it was made, I could see some logic to the law. But since the two functions, distillation and aging, can be separated geographically and have been in the history of American whiskey manufacture, to say you can age it "close" to the still but not outside the state seems not logically justifiable. Still, if I were the state, I'd fight it on the ground that the license should follow so to speak the stages of manufacture and once out of the state, the license can't be policed effectively. E.g., what if (looking at it from a 1930's perspective but the logic still applies), aging is in an insalubrious place? Or people are adding stuff to the barrels. Well, the state may wish to warn the distiller or take away the license - but it can't do that where the make is being aged over in Kentucky..

Gary

VT Mike said...

Chuck, a few days ago you said the Tennessee Whiskey standards argument was all about Jack Daniels vs Johnnie Walker. This post seems to imply that it was actually about Diageo wanting to age product that was distilled at Dickel outside of Tennessee. Please clarify.

Chuck Cowdery said...

Two different issues. This is the lesser one, really, in terms of the stakes. It appears that Diageo thought it could sneak in the change to the storage law under cover of the standards debate. Failing that, they filed suit at the deadline for responding to their citation for violating the storage law.

Anonymous said...

Gary Gillman's post tells you all you need to know as to why lawyers have earned the reputation that they have. If there was some 8th grade Latin in there it would make it even more clear.

Gary Gillman said...

Anonymous, I don't know if you are aware, but Chuck Cowdery has a legal background and my comment was primarily directed to him.

Gary

Anonymous said...

Gary - if that's how lawyers like to chew the fat amongst themselves then I'll reiterate that there are reasons most people can't stand them and this makes the point. Maybe some good Bourbon would help to mitigate the droning legalrrhea.

Gary Gillman said...

Chuck, I have nothing more to say. Maybe you do?

Gary

Chuck Cowdery said...

Lawyer bashing can be amusing, although nothing here was. It's nothing more than chin music in my opinion, what people say to say something when they have nothing to say about the actual topic. Like most professionals, lawyers like to read the clues left by other lawyers in their draftings. Gary knows I have that training and like to play that game. If you don't, why not just change the channel instead of taking gratuitous potshots?