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.