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Byrd v. Tennessee Wine and Spirits Retailers Association

United States Court of Appeals, Sixth Circuit

February 21, 2018

Clayton Byrd, in his official capacity as Executive Director of the Tennessee Alcoholic Beverage Commission; Tennessee Fine Wines and Spirits, LLC, dba Total Wine Spirits Beer & More; Affluere Investments, Inc., dba Kimbrough Fine Wine & Spirits, Plaintiffs-Appellees,
v.
Tennessee Wine and Spirits Retailers Association, Defendant-Appellant.

          Argued: November 30, 2017

          Appeal from the United States District Court for the Middle District of Tennessee at Nashville. No. 3:16-cv-02738-Kevin H. Sharp, District Judge.

         ARGUED:

          Richard L. Colbert, KAY GRIFFIN, PLLC, Nashville, Tennessee, for Appellant.

          William J. Murphy, ZUCKERMAN SPAEDER LLP, Baltimore, Maryland, for Appellee Tennessee Fine Wines and Spirits. Keith C. Dennen, FARRIS BOBANGO, PLC, Nashville, Tennessee, for Appellee Affluere Investments.

         ON BRIEF:

          Richard L. Colbert, John J. Griffin, Jr., Nina M. Eiler, KAY GRIFFIN, PLLC, Nashville, Tennessee, for Appellant.

          William J. Murphy, ZUCKERMAN SPAEDER LLP, Baltimore, Maryland, Edward M. Yarbrough, W. Justin Adams, BONE MCALLESTER NORTON PLLC, Nashville, Tennessee, for Appellee Tennessee Fine Wines and Spirits. Keith C. Dennen, FARRIS BOBANGO, PLC, Nashville,

          Tennessee, for Appellee Affluere Investments. Sarah K. Campbell, OFFICE OF THE TENNESSEE ATTORNEY GENERAL, Nashville, Tennessee, for Appellee Clayton Byrd.

          Before: DAUGHTREY, MOORE, and SUTTON, Circuit Judges.

          OPINION

          KAREN NELSON MOORE, Circuit Judge.

          Defendant-Appellant Tennessee Wine and Spirits Retailers Association ("Association") appeals the district court's order granting summary judgment regarding § 57-3-204(b) of Tennessee Code Annotated. Under § 57-3-204(b), to receive a retailer-alcoholic-beverages license, a person, corporation, or firm needs to be a Tennessee resident for at least two years, and to renew a license, there is a ten-year requirement. After examination, the district court determined that these durational-residency requirements violate the dormant Commerce Clause.

         For the reasons discussed below, we AFFIRM the district court's judgment declaring § 57-3-204(b)(2)(A), (3)(A)-(B), and (3)(D) in violation of the dormant Commerce Clause and SEVER those provisions from the Tennessee statute.

         I. BACKGROUND

         In Tennessee, the distribution of alcoholic beverages occurs through a "three-tier system." Jelovsek v. Bredesen, 545 F.3d 431, 433 (6th Cir. 2008). "The Tennessee Alcoholic Beverage Commission ('TABC') issues separate classes of licenses to manufacturers and distillers, wholesalers, and liquor retailers." Id. at 433-34 (citing Tenn. Code Ann. § 57-3-201). "Manufacturers are limited to selling to wholesalers; wholesalers may sell to retailers, or in some cases other wholesalers; consumers are required to buy only from retailers." Id. at 434 (citing Tenn. Code Ann. § 404(b)-(d)).

         A license from the TABC is required to sell "alcoholic spirituous beverages, including beer and malt beverages." Tenn. Code Ann. § 57-3-204(a). However, to obtain a license, an individual must have "been a bona fide resident of [Tennessee] during the two-year period immediately preceding the date upon which application is made to the commission." Id. § 57-3-204(b)(2)(A). Additionally, the statute imposes a ten-year residency requirement to renew the license. Id.

         A corporation faces similar barriers, and it cannot receive a license "if any officer, director or stockholder owning any capital stock in the corporation, would be ineligible to receive a retailer's license for any reason specified in subdivision (b)(2)." Id. § 57-3-204(b)(3)(A). Moreover, "[a]ll of [a corporation's] capital stock must be owned by individuals who are residents of [Tennessee] and either have been residents of the state for the two (2) years immediately preceding the date application is made to the commission or, " for renewal, "has at any time been a resident of [Tennessee] for at least ten (10) consecutive years." Id. § 57-3-204(b)(3)(B).

         Two entities-Plaintiff-Appellee Tennessee Fine Wines and Spirits, LLC, d/b/a Total Wine Spirits Beer & More, and Plaintiff-Appellee Affluere Investments, Inc., d/b/a/ Kimbrough Fine Wine & Spirits-did not satisfy these barriers prior to applying for retail licenses. As of November 2016, Fine Wines's principal address and Affluere's principal address were outside of Tennessee. R. 23-2 (Resp. Ex. 2) (Page ID #133); R. 23-3 (Resp. Ex. 3) (Page ID #134). And Fine Wines's members are not Tennessee residents. R. 55-1 (Mot. Summ. J. Ex. 1 ¶ 5) (Page ID #298). Therefore, the TABC deferred voting on these applications. Id. ¶¶ 13, 15 (Page ID #299); R. 1-1 (Compl. ¶ 15) (Page ID #7); R. 1-2 (Affluere Answer ¶ 15) (Page ID #38).

         When the Association, which represents Tennessee's business owners, discovered that Fine Wines and Affluere had pending applications, it informed the TABC that litigation was likely. R. 1-1 (Compl. ¶¶ 2, 16, 17) (Page ID #5, 8); R. 80 (Ass'n Am. Answer ¶¶ 2, 16, 17) (Page ID #495, 498). Because of these conflicts, Tennessee's Attorney General filed this action in the Chancery Court for Davidson County, on behalf of Plaintiff-Appellee Clayton Byrd, the Executive Director of the TABC, to obtain a declaratory judgment construing the constitutionality of the durational-residency requirements. R. 1-1 (Compl. at 1) (Page ID #4). The Defendant Association removed the case to the United States District Court for the Middle District of Tennessee.[1]

         The district court determined that the durational-residency requirements are unconstitutional. See Byrd v. Tenn. Wine & Spirits Retailers Ass'n, 259 F.Supp.3d 785, 797-98 (M.D. Tenn. 2017). Based on the statutory language, the district court found that the durational-residency requirements are facially discriminatory. See id. at 790. And although the Twenty-first Amendment does give Tennessee power to regulate alcoholic beverages, the district court "agree[d] with the Fifth Circuit that 'state regulations of the retailer and wholesaler tiers are not immune from Commerce Clause scrutiny just because they do not discriminate against out-of-state liquor.'" Id. at 790, 793 (quoting Cooper v. Tex. Alcoholic Beverage Comm'n (Cooper II), 820 F.3d 730, 743 (5th Cir.), cert. denied sub nom. Tex. Package Stores Ass'n, Inc. v. Fine Wine & Spirits of N. Tex., LLC, --- U.S. ---, 137 S.Ct. 494 (2016)). Additionally, nondiscriminatory alternatives could achieve the durational-residency requirements' purposes-citizen health and alcohol regulation. Id. at 796-97. The district court therefore determined that Tennessee's durational-residency requirements violate the dormant Commerce Clause and granted Fine Wines's motion for summary judgment. Id. at 797-98.

         II. DISCUSSION

         We review de novo a district court's decision to grant summary judgment, Lenscrafters, Inc. v. Robinson, 403 F.3d 798, 802 (6th Cir. 2005), and we also review de novo a district court's determination of the constitutionality of a state statute, Cmtys. for Equity v. Mich. High Sch. Athletic Ass'n, 459 F.3d 676, 680 (6th Cir. 2006). Granting summary judgment is appropriate when "there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a). For this determination, we review all facts in a light that is most favorable to, and draw all reasonable inferences in favor of, the nonmoving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986).

         A. The Twenty-first Amendment Does Not Immunize Tennessee's Durational-Residency Requirements

         Under the Supreme Court's governing standard, Tennessee's interests in the durational-residency requirements are not closely related to its power under the Twenty-first Amendment. Therefore, the Twenty-first Amendment does not immunize Tennessee's durational-residency requirements from scrutiny under the dormant Commerce Clause.

         1. Tennessee's Durational-Residency Requirements in Light of Granholm and Bacchus

         Section 2 of the U.S. Constitution's Twenty-first Amendment states that "[t]he transportation or importation into any State, Territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited." U.S. Const. amend XXI, § 2. Pursuant to the Twenty-first Amendment, a state has the power to regulate the distribution of alcoholic beverages into the state or within its borders.

         "Initially, the Supreme Court afforded the states nearly limitless power to regulate alcohol under the [Twenty-first Amendment]." Heald v. Engler, 342 F.3d 517, 522 (6th Cir. 2003), aff'd sub nom. Granholm v. Heald, 544 U.S. 460 (2005). However, "as early as the 1960s, the Supreme Court signaled a break with this line of reasoning."[2] Id. And in 1984, the Supreme Court reiterated in Bacchus Imports, Ltd. v. Dias, 468 U.S. 263 (1984), that the Commerce Clause limits a state's power under the Twenty-first Amendment. Heald, 342 F.3d at 523.

         In Bacchus, the Supreme Court noted that "[i]t is by now clear that the [Twenty-first] Amendment did not entirely remove state regulation of alcoholic beverages from the ambit of the Commerce Clause." 468 U.S. at 275. "To draw a conclusion that the Twenty-first Amendment has somehow operated to 'repeal' the Commerce Clause wherever regulation of intoxicating liquors is concerned would . . . be an absurd oversimplification." Id. (quoting Hostetter v. Idlewild Bon Voyage Liquor Corp., 377 U.S. 324, 331-32 (1964)). The Supreme Court stated that "both the Twenty-first Amendment and the Commerce Clause are parts of the same Constitution and each must be considered in light of the other and in the context of the issues and interests at stake in any concrete case." Id. (quoting Hostetter, 377 U.S. at 332). Additionally, the Supreme Court emphasized that "[s]tate laws that constitute mere economic protectionism are therefore not entitled to the same deference as laws enacted to combat the perceived evils of an unrestricted traffic in liquor." Id. at 276. Because of these issues, the Supreme Court stated that a court needs to consider "whether the interests implicated by a state regulation are so closely related to the powers reserved by the Twenty-first Amendment that the regulation may prevail, notwithstanding that its requirements directly conflict with express federal policies." Id. at 275-76 (quoting Capital Cities Cable, Inc. v. Crisp, 467 U.S. 691, 714 (1984)).

         The Supreme Court examined Hawaii's tax exemption at the wholesale tier for okolehao, which is a root from an indigenous shrub, and pineapple wine in Bacchus. Id. at 265. The question before the Supreme Court was "whether the principles underlying the Twenty-first Amendment are sufficiently implicated by the exemption for okolehao and pineapple wine to outweigh the Commerce Clause principles that would otherwise be offended." Id. at 275. The Supreme Court noted that Hawaii did "not seek to justify its tax on the ground that it was designed to promote temperance or to carry out any other purpose of the Twenty-first Amendment, but instead acknowledges that the purpose was 'to promote a local industry.'" Id. at 276. Thus, the Supreme Court determined that the Twenty-first Amendment did not immunize Hawaii's law "because the tax violates a central tenet of the Commerce Clause but is not supported by any clear concern of the Twenty-first Amendment." Id.

         In Granholm, the Supreme Court examined whether "a State's regulatory scheme that permits in-state wineries directly to ship alcohol to consumers but restricts the ability of out-of-state wineries to do so violate[s] the dormant Commerce Clause in light of § 2 of the Twenty-first Amendment." 544 U.S. at 471. When considering this question, the Supreme Court stated that "[s]tate policies are protected under the Twenty-first Amendment when they treat liquor produced out of state the same as its domestic equivalent." Id. at 489. And because the "instant cases" before the Supreme Court "involve[d] straightforward attempts to discriminate in favor of local producers . . . [t]he discrimination [was] contrary to the Commerce Clause and [was] not saved by the Twenty-first Amendment." Id. The Supreme Court also reasserted its previous recognition that "the three-tier system itself is 'unquestionably legitimate.'" Id. at 489 (quoting North Dakota v. United States, 495 U.S. 423, 432 (1990)).

         The interaction between Bacchus and Granholm has created some uncertainty. Does scrutiny under the dormant Commerce Clause apply only when an alcoholic-beverages law regulates producers or products? And does the Twenty-first Amendment automatically immunize a state law regarding retailers and wholesalers of alcoholic beverages? The Second, Fourth, Fifth, and Eighth Circuits have attempted to reconcile the cases. Cooper II, 820 F.3d at 743; S. Wine & Spirits of Am., Inc. v. Div. of Alcohol & Tobacco Control, 731 F.3d 799, 809, 810 (8th Cir. 2013); Arnold's Wines, Inc. v. Boyle, 571 F.3d 185, 190 (2nd Cir. 2009); Brooks v. Vassar, 462 F.3d 341, 352 (4th Cir. 2006).

         For example, in Arnold's Wines the Second Circuit examined a state law allowing in-state licensed retailers to deliver alcoholic beverages to customers' homes but preventing out-of-state retailers from doing the same. 571 F.3d at 188. The court stated that "[t]he Granholm Court set forth the test for determining the constitutionality of state liquor regulations, " which was that "[i]f the state measure discriminates in favor of in-state producers or products, the regulatory regime is not automatically saved by the Twenty-first Amendment simply by virtue of the special nature of the product regulated." Id. at 189. Additionally, the court reasoned that "[i]t is only where states create discriminatory exceptions to the three-tier system, allowing in-state, but not out-of-state, liquor to bypass the three regulatory tiers, that their laws are subject to invalidation based on the Commerce Clause." Id. at 190. Thus, "Appellants' challenge to the ABC Law's provisions requiring all wholesalers and retailers be present in and licensed by the state . . . [was] a frontal attack on the constitutionality of the three-tier system itself." Id. "Appellants' argument [was] therefore directly foreclosed by the Granholm Court's express affirmation of the legality of the three-tier system." Id. at 190-91.

         In Southern Wine, the Eighth Circuit examined Missouri's law requiring a corporation- including its directors, officers, and super-majority of shareholders-to be residents of Missouri for three years prior to obtaining a wholesaler-alcoholic-beverages license. 731 F.3d at 802-03. When reviewing "the current state of the relationship between the dormant Commerce Clause and the Twenty-first Amendment, " the Eighth Circuit noted that, "in its most recent pronouncement on the subject, the Supreme Court simultaneously cited Bacchus and said that 'state policies are protected under the Twenty-first Amendment when they treat liquor produced out of the state the same as its domestic equivalent.'" Id. at 809 (citing Granholm, 544 U.S. at 489). "Given Granholm's recency and specificity, " the court decided that Granholm provided the "best guidance." Id. The Eighth Circuit concluded that "[i]f it is beyond question that States may require wholesalers to be 'in-state' without running afoul of the Commerce Clause, then . . . States have flexibility to define the requisite degree of 'in-state' presence to include the in-state residence of wholesalers' directors and officers, and a super-majority of their shareholders." Id. at 810 (citation omitted). "Insofar as Granholm imported [Bacchus's] balancing approach to regulations of the three-tier system, . . . it drew a bright line between the producer tier and the rest of the system." Id. Therefore, in the view of the Eighth Circuit, the residency requirement for alcoholic-beverages wholesalers did not violate the dormant Commerce Clause. See id. at 809.

         Conversely, the Fifth Circuit determined that Bacchus is still good law. In Cooper II, the defendant, a Texas trade association, moved for relief from an injunction under Federal Rule of Civil Procedure 60(b) on the ground that Granholm created a significant change in the law since the Fifth Circuit enjoined a state durational-residency requirement in Cooper v. McBeath (Cooper I), 11 F.3d 547 (5th Cir. 1994). Cooper II, 820 F.3d at 734, 742. However, the Fifth Circuit disagreed. After examining the language in Granholm, the Fifth Circuit held that Granholm did not overrule or alter Bacchus. Id. at 742. And regarding Granholm's statement that "state policies are protected under the Twenty-first Amendment when they treat liquor produced out of state the same as its domestic equivalent, " the Fifth Circuit determined that this statement did not limit scrutiny under the Commerce Clause to producers because the statement was dicta. Id. at 743. Instead, the Fifth Circuit "interpreted [Granholm] as reaffirming the applicability of the Commerce Clause to state alcohol regulations, but to a lesser extent when the regulations concern the retailer or wholesaler tier as distinguished from the producer tier, of the three-tier distribution system."[3] Id.

         We find the Fifth Circuit's reconciliation of Bacchus and Granholm persuasive for six reasons. First, the Supreme Court explicitly declined to overrule Bacchus in Granholm. Second, in Granholm, the Supreme Court reiterated Bacchus's concern about the protection of economic interests across state lines, suggesting that the Twenty-first Amendment does not automatically immunize a state's alcoholic-beverages law regarding wholesalers or retailers. Third, the Supreme Court emphasized that the Twenty-first Amendment does not permit a state to discriminate on the basis of citizenship; accordingly, the flow of products across state lines is not the sole concern under the dormant Commerce Clause. Fourth, the Supreme Court again stated that the Commerce Clause limits the Twenty-first Amendment. Fifth, the Supreme Court also stated that there are times when the three-tier system is invalid. And lastly, Granholm did not limit its application of the Commerce Clause to alcoholic-beverages laws regarding producers.[4]Thus, Bacchus and Granholm are reconcilable.

          First, the Supreme Court in Granholm explicitly declined to overrule Bacchus; therefore, the reasoning in Bacchus still stands:

Recognizing that Bacchus is fatal to their position, the States suggest it should be overruled or limited to its facts. As the foregoing analysis makes clear, we decline their invitation. Furthermore, Bacchus does not stand alone in recognizing that the Twenty-first Amendment did not give States complete freedom to regulate where other constitutional principles are at stake. A retreat from Bacchus would also undermine Brown-Forman and Healy. These cases invalidated state liquor regulations under the Commerce Clause. Indeed, Healy explicitly relied on the discriminatory character of the Connecticut price affirmation statute. 491 U.S., at 340-41. Brown-Forman and Healy lend significant support to the conclusion that the Twenty-first Amendment does not immunize all laws from Commerce Clause challenge.

Granholm, 544 U.S. at 488. Clearly, the Supreme Court refused to overrule Bacchus or limit Bacchus to its facts.

         Second, in Granholm, the Supreme Court focused on a general Commerce Clause principle-the prohibition of discrimination against out-of-state economic interests. The Court began by discussing this general principle: "[t]ime and again this Court has held that, in all but the narrowest circumstances, state laws violate the Commerce Clause if they mandate 'differential treatment of in-state and out-of-state economic interests that benefits the former and burdens the latter.'" Id. at 472 (emphasis added) (quoting Or. Waste Sys., Inc. v. Dep't of Envtl. Quality, 511 U.S. 93, 99 (1994)). "When a state statute directly regulates or discriminates against interstate commerce, or when its effect is to favor in-state economic interests over out-of-state interests, [the Supreme Court has] generally struck down the statute without further inquiry."[5] Id. at 487 (emphasis added) (quoting Brown-Forman, 476 U.S. at 579).

          Third, the Supreme Court also discussed the general principle that a state cannot bar out-of-state citizens from engaging in its economy; thus, a state's alcoholic-beverages law is not automatically valid just because it "treat[s] liquor produced out of state the same as its domestic equivalent."[6] Id. at 489. The Supreme Court stated that "[t]he rule prohibiting state discrimination against interstate commerce follows also from the principle that States should not be compelled to negotiate with each other regarding favored or disfavored status for their own citizens." Id. at 472. Laws cannot "deprive citizens of their right to have access to the markets of other States on equal terms." Id. at 473. Additionally, the Supreme Court has "viewed with particular suspicion state statutes requiring business operations to be performed in the home State that could more efficiently be performed elsewhere." Id. at 475. For instance, in Granholm, the Supreme Court stated that "New York's in-state presence requirement runs contrary to [the Supreme Court's] admonition that States cannot require an out-of-state firm 'to become a resident in order to compete on equal terms.'" Id. at 475 (first quoting Halliburton Oil Well Cementing Co. v. Reily, 373 U.S. 64, 72 (1963); and then citing Ward v. Maryland, 12 Wall. 418 (1871)). Therefore, scrutiny under the dormant Commerce Clause is not limited to laws regarding products.

         Fourth, the Supreme Court again emphasized in Granholm that the Commerce Clause limits a state's power under the Twenty-first Amendment. According to the Court, "[t]he central purpose of the [Twenty-first Amendment] was not to empower States to favor local liquor industries by erecting barriers to competition." Id. at 487 (quoting Bacchus, 468 U.S. at 276). Regardless of the Twenty-first Amendment, "state regulation of alcohol is limited by the nondiscrimination principle of the Commerce Clause." Id. (first citing Bacchus, 468 U.S. at 276; then citing Brown-Forman, 476 U.S. at 573; and then citing Healy v. Beer Inst., 491 U.S. 324 (1989)). Therefore, in Granholm, the Supreme Court continued to recognize that the Commerce Clause does limit the Twenty-first Amendment.

         Fifth, a state's alcoholic-beverages law is not immune simply because it is part of a three-tier system. In Granholm, New York and Michigan "argue[d] that any decision invalidating their direct-shipment laws would call into question the constitutionality of the three-tier system." Id. at 488. But the Supreme Court disagreed, noting that, although three-tier systems are "unquestionably legitimate, " those systems are not valid when they "involve straightforward attempts to discriminate in favor of local producers." Id. at 488, 489. Based on this language, a state's alcoholic-beverages law is not automatically valid simply because it addresses a portion of a three-tier system.[7]

          And lastly, the Supreme Court did not state that the Commerce Clause applies only to alcoholic-beverages laws regarding producers. The statement that "[s]tate policies are protected under the Twenty-first Amendment when they treat liquor produced out of state the same as its domestic equivalent" must be read in its context. Id. at 489. The Supreme Court wrote the full paragraph as follows:

The States argue that any decision invalidating their direct-shipment laws would call into question the constitutionality of the three-tier system. This does not follow from our holding. "The Twenty-first Amendment grants the States virtually complete control over whether to permit importation or sale of liquor and how to structure the liquor distribution system." Midcal, supra, at 110. A State which chooses to ban the sale and consumption of alcohol altogether could bar its importation; and, as our history shows, it would have to do so to make its laws effective. States may also assume direct control of liquor distribution through state-run outlets or funnel sales through the three-tier system. We have previously recognized that the three-tier system itself is "unquestionably legitimate." North Dakota v. United States, 495 U.S., at 432. See also id., at 447 (Scalia, J., concurring in judgment) ("The Twenty-first Amendment . . . empowers North Dakota to require that all liquor sold for use in the State be purchased from a licensed in-state wholesaler"). State policies are protected under the Twenty-first Amendment when they treat liquor produced ...

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