R.J. O'Hara is president of Flaherty & O'Hara, a Pennsylvania-based boutique law firm.

On June 26, 2019, the U.S. Supreme Court issued its opinion in Tennessee Wine & Spirits Retailers Association v. Thomas, 139 S.Ct. 2449 (2019) (Tennessee Retailers), a case that was much anticipated in the alcohol industry. Simply stated, this case addressed the constitutionality of a Tennessee state law that required applicants for state-issued retail package store liquor licenses to be two-year residents in the state before issuance of licenses and 10-year residents before renewal of licenses. (The residency requirements apply to shareholders, etc., of entities that apply for licenses. The state technically dropped the argument in favor of the 10-year residency requirement for renewals.)

Many questions were raised and discussed within the alcohol industry while this decision was pending, and in its wake: Will the Supreme Court firmly establish the constitutionality of state residency requirements for liquor license ownership? Will the court gut all state residency requirements? How far will the court go—will its opinion support the interstate shipping of alcohol by retailers? Will state physical presence requirements for retail package store licensees fall, as well, if state residency requirements fall? And, of course, will the much vaunted and much maligned three-tiered system of alcohol distribution in the United States survive the decision? The answers to these questions could have very real impacts on businesses selling alcohol, as well as on how consumers buy alcohol.

The Tennessee Retailer court held that Tennessee's residency requirement was unconstitutional under the dormant commerce clause. The Supreme Court has, for many decades, held that the dormant, or implied provision of the Constitution's commerce clause, limits states' ability to issue regulations that interfere with interstate commerce, even if Congress has not taken specific action applicable the conduct. Under the dormant commerce clause a state cannot expressly or in effect discriminate against out-of-state interests in favor of in-state interests or place unreasonable burdens or requirements on interstate commerce. But, applying the anti-discrimination provisions of the dormant commerce clause to state alcohol regulations is far more complex than applying it to regulations governing any other product.

Section 2 of the 21^st Amendment has been interpreted as giving states greater deference and leeway to regulate alcohol importation and sales within their borders than when regulating other, nonalcohol products, but the limits of that ability to regulate in a way that interferes with interstate commerce have not been fully established, even after Tennessee Retailers. The Tennessee Retailers' court expressly limited the applicability of its opinion to the case and facts at hand. Instead, it provided guidance for further analysis of the constitutionality of state liquor laws that may impact interstate commerce.

Prior to Tennessee Retailers, it was clear that the dormant commerce clause applied to alcohol products and producers, but not that it applied to retailers or wholesalers. See Granholm v Heald, 544 U.S. 460 (2005); Bacchus Imports v. Diaz, 468 U.S. 263 (1984) and Hostetter v. Idlewild Bon Voyage Liquor, 377 U.S. 324 (1964). As a result of Tennessee Retailers, we now know that it does. But does the applicability of the dormant commerce clause mean that a state law that has any direct or indirect discriminatory impact on a retailer or wholesaler is de facto unconstitutional and cannot be insulated by the 21^st Amendment? The answer under Tennessee Retailers is that a law enacted by a state under the powers granted to it by the 21^st Amendment and that discriminates against out-of-state interests may well be unconstitutional under the commerce clause and not protected by the 21^st Amendment. Stated another way, the 21^st Amendment does not insulate a discriminatory state law from the application of the dormant commerce clause just because it has been promulgated pursuant to 21^st Amendment authority.

To determine the constitutionality of a challenged state liquor law, an analysis is required of whether the state law legitimately protects the health and safety of state residents. States are not free to "adopt protectionist" laws that have no "demonstrable connection" to the promotion of health and safety of state residents, see Tennessee Retailers, 139 S. Ct. at 2474. Speculative or unsupported assertions that the law protects public health and safety will not suffice; concrete evidence demonstrating that the law is necessary for the protection of public health and safety is required in order to insulate a law that has a discriminatory impact. Finally, the state or other litigant must show that no "nondiscriminatory alternatives" offering the same protection are available.

The first significant federal appellate court case alleging that a state law interfered with interstate commerce, by way of a discriminatory liquor licensing provision is Wal-Mart Stores v. Texas Alcoholic Beverage Commission, No 18-50299 (5^th Cir. Aug. 15, 2019) (Wal-Mart Texas). In the Wal-Mart Texas case, Wal-Mart challenged a Texas state law that bans publicly traded companies from holding state-issued full package store, or "P permits," which allow the holder thereof to sell spirits, wine and ale for off-premises consumption. The district court held that the ban was discriminatory and created a burden on interstate commerce. The U.S. Court of Appeals for the Fifth Circuit Court strenuously disagreed with the district court's analysis and vacated and remanded, finding that since the law precluded both Texas-domiciled and non-Texas-domiciled publicly traded companies from holding P permits it was not unconstitutional.

The Fifth Circuit also paid passing respect to Tennessee Retailers, but engaged in a separate analysis, which it believed was consistent with and warranted by Tennessee Retailers, to conclude that the challenged law was both facially neutral and created no burden on interstate commerce. The fact that the district court found, and that the Fifth Circuit Court agreed, that Texas had a clear history of discriminating against out-of-state alcohol retailers, and that 98% of Texas' P permits are held by in-state residents was not persuasive to the circuit court.

The Fifth Circuit accepted that the state's express purpose in enacting the ban on publicly traded companies was to maintain licensee accountability and to require a specifically identified person who is responsible for running the licensed business in Texas. But publicly traded companies can and do appoint "licensed managers" as readily and as reliably as nonpublicly traded companies. Virtually every day, in the normal course of business, the publicly traded owners of on-premises retail licensees—chain restaurants, hotels, bars and concessionaires—appoint licensed managers on forms provided by state liquor agencies, and the owners of these on-premises licenses are virtually never subjected to either a publicly traded ban or residence requirements. States entrust these publicly owned businesses to take good care of their residents when serving alcohol to them to be financially accountable to the state. All this, despite the fact that on-premises licensees are probably just as likely to serve patrons who are minors or who are visibly intoxicated as off-premises licensees are. There was no evidence in Wal-Mart Texas that publicly traded companies are less accountable or less responsible than those owned by in-state domiciled privately held entities or by individual in-state residents.

In the Eighth Circuit, in Sarasota Wine Markets v. Michael Parson, 8^th Cir. No.19-1948 (2019) (Sarasota Wine), the appellant sued Missouri as a result of a state law that permits in-state licensed Missouri retail package stores to ship directly to Missouri residents, while prohibiting the plaintiff, Sarasota Wine Markets, a Florida retailer, from doing the same.

The Sarasota Wine district court twice disposed of the case, the first time allowing an amended complaint to be filed, and the second time around upholding the statute and finding for the state. The Tennessee Retailers opinion had not be delivered when U.S. District Judge Henry E. Autrey of the Eastern District of Missouri, issued his ruling; instead he cited Granholm and Southern Wine & Spirits of American v. Division of Alcohol and Tobacco Control, 731 F.3d 799 (8^th Cir. 2019) (Southern Wine) in support of his conclusion that the state prohibition was a legitimate exercise of state authority under the 21^st Amendment and did not violate the commerce clause. He adopted what he perceived was the limitation on the application of the dormant commerce clause by Granholm to alcohol products and the producer/manufacturer tier of the alcohol industry. As we have seen, however, in Tennessee Retailers the Supreme Court rejected the interpretation of Granholm as being limited to products and producers. Thus, on appeal, the Eighth Circuit will be forced to take a new, close look at the arguments and law and will be forced to apply the principles of Tennessee Retailers to the case before it.

In the Seventh Circuit, Lebamoff Enterprises v. Rauner, 909 F.3d 847 (7^th Cir. 2018) (Lebamoff- Illinois), filed in 2016, is winding its way from its early dismissal by the district court, up to the Seventh Circuit on appeal, then on remand back to the district court.  Notably, the Seventh Circuit panel that considered Lebamoff-Illinois on appeal did so before the Tennessee Retailers decision, but its opinion is nonetheless consistent with Tennessee Retailers. The Seventh Circuit panel unanimously rejected the state's argument that Granholm establishes a bright-line test that applies only to products and producers. In Lebamoff-Illinois the appellant/plaintiffs own Indiana-based retail off-premises package stores and would like to ship wine direct to Illinois residents, but they have been foreclosed from doing so by the state because they do not have a physical presence in Illinois. The Seventh Circuit remanded for trial, noting specifically that the outcome could be determined by Tennessee Retailers, which had not been decided at that time.

Finally, in March 2020, in Lebamoff Enterprises v. Snyder, 6^th Cir. No. 18-2199 (2019) (Lebamoff- Michigan), the Sixth Circuit will hear oral argument on appeal of the district court's ruling in favor of Lebamoff, and finding that Michigan's ban on shipments of wine by out-of-state retailers to Michigan residents was unconstitutional where Michigan allows in-state retailers of wine to ship direct to Michigan residents. (The Lebamoff plaintiffs/appellants in the Illinois and Michigan cases are the same, but they received opposite rulings in their respective district courts.)

Clearly, not all federal district and appellate courts are coming to the same conclusion on similar constitutional issues, whether they are addressing residency or physical presence requirements, or other issues, such as the ban against publicly traded companies holding certain license types. Over the last decade or so, states have created near innumerable exceptions to their three-tiered systems: most states allow licensed on-premises restaurants to make and sell their own beer, wine and spirits; they allow manufacturers to sell their products by the drink on their manufacturing premises to retail customers; many allow manufacturers to self-distribute the products they manufacture, rather than using a wholesaler; and most allow out-of-state wineries to ship wine directly to state residents, bypassing both wholesalers and any state residency requirements that may be applicable to other industry members.

Selective exceptions to state three-tier systems that states have created may, in fact, make it more difficult for states to argue that their three-tiered systems are sacrosanct and must be protected because the exceptions weaken the system, as feared by some industry members when the changes were being initiated. Likewise, unsupported conclusions that residency and physical-presence requirements are necessary to protect public health and safety are likely to fail, ultimately, if states cannot demonstrate—with concrete evidence—how the laws protect the public, and if they cannot show that no nondiscriminatory alternatives are available.

Ultimately, on many of the issues being litigated in the lower courts, we will hear from the Supreme Court again, when it believes the time is right.

R.J. O'Hara is president of Flaherty & O'Hara, a Pennsylvania-based boutique law firm with 11 attorneys and 20 support staff practicing exclusively in the alcohol beverage space. O'Hara represents members of all three tiers of the alcohol industry, representing clients on general liquor licensing matters, complex ownership changes, in litigation and hearings, on multistate license acquisitions, and on administrative citations.