On October 15, 2018, we blogged about Tennessee’s regulations on licensing for retail sales of alcoholic beverages. Tennessee requires residency within the state for two years in order to obtain an initial license. It requires residency for 10 consecutive years to obtain a renewal of the initial license.  But the initial license only runs for a year. The statute also requires that all officers, directors and shareholders of corporations to satisfy these residency requirements. The effect of this statute is to prohibit publicly traded corporations from obtaining a liquor license. It also gives a clear edge to Tennessee residents at the expense of out-of-staters.

Last week, by a 7-2 vote, the Supreme Court held that the Tennessee statute violated the dormant commerce clause. Tennessee Wine And Spirits Retailers Ass’n v. Thomas, No. 18-96. The Court had previously held that the dormant commerce clause prohibited states from discriminating against out-of-state alcohol products. But the lower courts were split on whether it also prohibited discrimination against out-of-state actors, at least in the context of alcoholic beverages. The majority squarely held that the clause protects “nonresident economic actors” as well as goods.

Nothing in the commerce clause specifically prohibits discrimination against interstate commerce and the dormant commerce clause has been vigorously criticized. Unlike other rights that the Court has invented out of whole cloth, the concept that states may not discriminate against out-of-state products has a serious historical basis. One of the principal reasons for replacing the Articles of Confederation with the Constitution was protection of free trade in commerce.

The Court had little difficulty in concluding that the Tennessee residency requirements facially discriminated against non-residents. The more interesting question is whether the 21st amendment, which abolished Prohibition, trumped the dormant commerce clause.

Section 2 of the 21st amendment prohibits transportation or importation of alcoholic beverages into any state or territory “in violation of the laws thereof.”  That section was based on the 1913 Webb-Kenyon Act, which courts held applied only when states treated in-state and out-of-state alcohol the same.  If Tennessee attempted to apply its residency laws to purveyors of products other than alcohol, it would plainly violate the dormant commerce clause.  The presence of § 2, however, required a more nuanced analysis.

Because § 2 allows states to regulate for health and safety purposes, the majority inquired whether there was some such purpose, even if protectionism was an incidental result. Here, the two-year residency rule is entirely unnecessary to serve such objectives as ensuring service of process or responsible owners: requiring an in-state agent for service of process or investigation of the stores themselves would suffice. Rather, the predominant effect of the rule is protectionism and that cannot survive review under the dormant commerce clause.

Justice Gorsuch and Thomas dissented. Both have previously been critical of the entire concept of dormant commerce clause, a judicial creation rather than one by the text of the Constitution. The dissent reasoned that Congress had the authority to make exceptions to the dormant commerce clause and had done so with the Webb-Kenyon Act. As that statute allowed allow states broad powers over regulation of alcohol and was the basis for § 2, the Court should have deferred to Congress.

The dissent bolstered its view by discussing the history of state regulation of alcohol. In the first half of the 19th century, the Court generally upheld state laws regulating alcohol. When the Court took a more restrictive view at the end of that century, Congress responded with two statutes, including Webb-Kenyon, that purported to relax commerce clause restraints.

When Prohibition ended in 1933, at least 18 states adopted residency requirements for liquor licenses. And the Court initially upheld those statutes based on § 2. It was not until the end of the 20th century that the Court began applying the dormant commerce clause to state regulation of alcohol.

The dissent thought that ease of scrutiny of applicants for liquor licenses was a legitimate reason for a residency requirement. It also thought that there were legitimate reasons to require holders of such licenses to have a stake in the community by residing there, just as federal judges must generally reside in the district or circuit in which they serve.

Finally, the dissent criticized the majority for extending its previous rulings that states could not discriminate against out-of-state products to out-of-state providers. The dissent thought that such a distinction was absolutely critical to the rigid, tripartite distribution system most states imposed after Prohibition and explicitly approved by the Court: producer sells to wholesaler who resells to retailer who sells to customers.

We regard the majority result as the better policy, because discrimination against out-of-state products is always economically inefficient. But the dissent has a point: raising the price of alcohol to discourage its use was one of the aspects that the teetotalers insisted on as the price of ending Prohibition. From the standpoint of history and textual analysis of the Webb-Kenyon Act, the dissent has the better of the argument.