Dusty wine bottles/Photo by Dario Lo Presti/Shutterstock.com

The U.S. Supreme Court on Wednesday struggled to reconcile the broad power of states to regulate the distribution of alcohol within their borders with a competing constitutional restriction that local officials must not discriminate against out-of-state economic interests.

At the center of the conflict, whose outcome could have national economic repercussions, is Tennessee's two-year residency requirement for retail liquor licenses. The U.S. Court of Appeals for the Sixth Circuit held that the two-year requirement discriminated against out-of-state retailers. The Constitution's dormant commerce clause prohibits state legislation that discriminates against interstate commerce.

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Defending the residency requirement, Jones Day partner Shay Dvoretzky, counsel to the Tennessee Wine & Spirits Retailers Association, argued that the text of the 21st Amendment, which ended Prohibition, and the pre-Prohibition history of state regulations support the Tennessee rules.

“Is there an economic protectionism exception to the 21st Amendment,” asked Justice Sonia Sotomayor.

Dvoretzky said there was not one. But, he added, “there is no dormant commerce clause problem as long as the state treated in-state and out-of-state [retailers] alike,” which Tennessee does.

States have varying residency requirements and Tennessee is at the end of the spectrum, noted Justice Elena Kagan. “Isn't that clearly protectionism,” she asked Illinois Solicitor General David Franklin, who shared argument time with Dvoretzky on behalf of 36 states.

Franklin said a residency requirement at some point could be arbitrary under the 14th Amendment. Applying the dormant commerce clause, he said, would be “at odds” with the 21st Amendment's broad grant of authority to the states.

His opponents, Franklin said, “are asking the court to treat alcohol like any other product and it's not.”

Those opponents—the national retailer Total Wine among them—want to try to operate “as the Amazon of liquor,” Justice Neil Gorsuch told Total Wine's counsel, Sidley Austin partner Carter Phillips.

“No, Amazon wants to operate as the Amazon of liquor, or may at some point,” Phillips quipped to laughter in the courtroom.

Carter Phillips of Sidley Austin speaks at a Federalist Society event in 2008. Credit: Diego M. Radzinschi / NLJ

Besides Total Wine, the other challenger in the case is a family that bought a Memphis liquor store and moved from Utah to Tennessee for a healthier climate for their disabled daughter. The family is represented by the Institute for Justice's Michael Bindas.

Phillips told the justices that the “core principle” at stake was nondiscrimination. “We are being discriminated against,” he said. “The state has the burden to justify it. There is no nondiscriminatory purpose. The state in this case said absolutely nothing and the reason is clear—the sole purpose is to be exclusively protectionist.”

The case would be easy if it only involved the dormant commerce clause, said Gorsuch. “But alcohol is treated differently. We have the 21st Amendment.”

Justice Stephen Breyer added, “This has been the law for 100 years. Not all law makes sense. I get all the arguments, but I'm worried about that [pre-Prohibition] history when a lot of states said you have to be a resident.”

A decision is expected by July.