Friday, September 27, 2013

Southern Wine and Spirits Is Still Not Local Enough For Missouri

Warning: this post is very inside, about the booze business and the laws that regulate it. It may be sleep-inducing for some readers.

The U.S. Constitution's Commerce Clause was intended to create a national market for goods and services by preventing states from unfairly favoring in-state versus out-of-state businesses. With regard to alcoholic beverages, the Twenty-first Amendment, which repealed Prohibition, turned the Commerce Clause on its head. It gives the states broad discretion in the regulation of beverage alcohol sales.

Although the Twenty-first Amendment doesn't specifically require it, all states have used a mandatory 3-tier distribution system as part of their regulatory scheme. That means producers may only sell to state-licensed wholesalers, and only they may sell to the state's retailers, both stores and bars. (Missouri actually has a 4-tier system, but that's irrelevant for our purposes.)

Part of the rationale for this system is that producers are often national or international. It might be very hard for a state to legally 'reach' an akvavit producer in Sweden. That's why all states require wholesalers to be local business entities. The Swedish producer might be out of reach, but the distributor that actually brings the product into the state is not.

Unfortunately, a way around this requirement was easily found. Wholesalers are able to do business in multiple states by simply incorporating a subsidiary in every state in which they want to operate. As a result there are many wholesalers, such as Southern Wine and Spirits (SWS), that are effectively national companies. They comply with the letter of the law, if not its spirit.

Missouri's alcohol regulators have an answer for that. Simply incorporating a subsidiary in the state isn't good enough for them. They require that the licensee be at least 60 percent owned by Missouri residents and they carefully define who qualifies as a Missouri resident for their purposes.

Back in 2011, SWS sued in Federal Court to challenge the constitutionality of Missouri's rule. The trial court sided with the state and on Wednesday the 8th Circuit affirmed that decision, ruling that "the legislature legitimately could believe that a wholesaler governed by Missouri residents is more apt to be socially responsible and to promote temperance, because the officers, directors and owners are residents of the community and thus subject to negative externalities -- drunk driving, domestic abuse, underage drinking -- that liquor distribution may produce."

SWS was emboldened to sue because the U. S. Supreme Court's 2005 decision in Granholm v Heald (54 U.S. 460) revealed a chink in the Twenty-first Amendment's armor. The Court famously held that, "the aim of the Twenty-first Amendment was to allow States to maintain an effective and uniform system for controlling liquor by regulating its transportation, importation, and use. The Amendment did not give States the authority to pass nonuniform laws in order to discriminate against out-of-state goods, a privilege they had not enjoyed at any earlier time."

What the Court ruled was that the Twenty-first Amendment does not grant states a universal pass on the Commerce Clause when alcohol is involved. It was the first case to acknowledge an exception. When a law is unrelated to a legitimate state interest in regulating the transportation, importation, and use of alcohol, the usual understanding of the Clause applies.

SWS has not announced if it will appeal to the Supreme Court.


Anonymous said...

Here's the rest of the story --

nmisscommenter said...

They ought to appeal. Interesting to me as a student of the commerce clause. Very interesting.

I once was involved in litigation (early 80s) where the question was whether the 21st Amendment gave the state the authority to regulate or prohibit liquor advertising in a way that would not have been consistent with the then-new commercial speech cases. The Fifth Circuit said it did not.

Anonymous said...

Very interesting post. I work for a distributor in another state (just stating my bias). The part of this story, and others like it, that drives me nuts is how this court is suggesting that the decision made on this case would have any bearing on the moral consumption of alcohol. I do not see how the location of the owners of the distributorship would have an impact on the amount of drunk drivers, domestic disputes etc.
The only major consequence that I can see from having an out of state distributor is that some of the profits and some high salaries go elsewhere then in that particular state. That is definitely a negative and probably the true reason for fighting out of state influence.

Andy Keck said...

Just as an interesting aside, while Washington used to have a three-tier system, that' sno longer the case. From Wikipedia...

A substantial exception to the three-tier system is the State of Washington. In November 2011, voters in Washington approved Initiative 1183, which essentially dismantled the three-tier distribution system and the state-operated retailing system for the sale of liquor and wine... In Washington, retailers may bypass distributors by purchasing directly from producers, may negotiate volume discounts, and may warehouse their inventory themselves