Benjamin Shipper and Jason Canvasser
Clark Hill
Introduction
Direct to consumer shipments of wine continue to increase in popularity. Indeed, 45 states and the District of Columbia permit some form of direct to consumer shipping, enabling over 90% of Americans to connect directly with their favorite wineries. However, the federal Sixth Circuit Court of Appeals (the “Court”) recently dealt a blow to Michigan citizens hoping to lawfully purchase wine directly from large-scale wineries and other specialized retailers without a physical presence in Michigan. In Lebamoff Enterprises, Inc. v. Gretchen Whitmer (Case Nos. 18-2199, 18-2200), the Court upheld a 2017 Michigan statutory amendment to Michigan’s Liquor Control Code that permitted in-state wine retailers, only, to deliver wine directly to consumers through state-licensed “third party facilitators” or common carriers like FedEx or UPS. 2016 Mich. Pub. Acts 520, § 203(3), (15).
Alcohol Sales and the Constitution
Each state has the ability to choose whether to permit sales of alcohol within its borders and, if so, on what terms and in what way. U.S. Const. amend. XXI, § 2. Michigan, like many other states, utilizes a “three-tier system,” which forbids alcohol producers (the first tier) to sell directly to retailers or consumers. To access the market, producers must sell to wholesalers located within the state (the second tier). After that, in-state wholesalers sell exclusively to in-state retailers (the third tier), who in turn, make final sales to consumers. Businesses at each tier must be independently owned and licensed by the Michigan Liquor Control Commission. No one business may operate more than one tier. See Mich. Comp. Laws § 436.1603(4), (13). Michigan, like other states, restricts cooperation and joint marketing efforts between businesses at different tiers where such efforts would have similar effects.
Prior to Michigan’s 2017 statutory enactment, all retailers were prohibited from delivering wine directly to consumers. However, after Michigan amended the statute to permit Michigan (in-state) retailers to do so, an out-of-state wine retailer from Indiana (along with three aggrieved wine consumers from Michigan) filed suit, alleging that Michigan’s new law violated two provisions of the United States Constitution. First, the plaintiffs alleged that the new law violated the Commerce Clause (U.S. Const. art. I, § 8, cl. 3), which gives Congress the power “[t]o regulate Commerce ... among the several States,” including by impliedly “prohibit[ing] state laws that unduly restrict interstate commerce.” Lebamoff Enters. Inc. v. Whitmer, Case Nos. 18-2199, 18-2200, slip op. at 5 (6th Cir. Apr. 21, 2020) (citing Tenn. Wine & Spirits Retailers Ass’n v. Thomas, 139 S. Ct. 2449, 2459, 2461 (2019)). Under the Commerce Clause, a state law will be impliedly prohibited if it discriminates against “out-of-state goods or nonresident economic actors,” unless the state law is tailored to advance a legitimate state purpose. Id. (citing Tenn. Wine, 139 S. Ct. at 2461). Second, the plaintiffs alleged that the new law violated the Privileges and Immunities Clause by “plac[e] the citizens of each State upon” unequal “footing with citizens of other States, so far as the advantages resulting from citizenship in those States are concerned.” Id. at 14 (citing McBurney v. Young, 569 U.S. 221, 228 (2013)).
The Sixth Circuit Reverses the Trial Court
The trial court granted summary judgment for these plaintiffs on their constitutional claims. Rather than striking Michigan’s statutory amendment as unconstitutional and returning matters to the status quo, which prohibited all delivery by retailers to consumers, the trial court chose to remedy the violations by extending delivery rights to out-of-state retailers. The State of Michigan appealed.
On appeal, the Court reiterated that the three-tier system of alcohol distribution has been a crucial part of multiple states’ efforts to control the flow of alcohol since the end of Prohibition in 1933. In particular, the Court observed that wholesalers play a key role in that three-tier system, and the 21st Amendment allows states to funnel alcohol sales from suppliers through in-state distributors to licensed retailers.
The Court identified that, when reviewing a Commerce Clause challenge to a state’s alcohol regulation, the unique test of whether the law “can be justified as a public health or safety measure or on some other legitimate nonprotectionist ground” applies. Tenn. Wine & Spirits, 139 S. Ct. at 2474. “If the ‘predominant effect of the law is protectionism,’ rather than the promotion of legitimate state interests, the Twenty-first Amendment does not ‘shield[]’ it.” Lebamoff Enters, slip op. at 5 (citing Tenn. Wine, 139 S. Ct. at 2474).
The Court recognized that the purpose of this three-tier system is to balance the availability of alcohol to consumers against excessively low prices that could overstimulate consumption. By upholding Michigan’s amended statute, the Court preserved Michigan’s authority to prevent out-of-state retailers, like the Indiana wine retailer, who did not participate in Michigan’s regulatory requirements, from undercutting Michigan retailer prices and “escap[ing] the State’s interests in limiting consumption.” The Court concluded that Michigan presented sufficient evidence to show that requiring an in-state presence serves the public health (e.g., by permitting Michigan’s Liquor Control Commission to physically inspect Michigan-based retailers for regulatory compliance) and that the plaintiffs failed to “sufficiently refute[]” that evidence. As a result, the Court reversed the lower court’s decision and remanded the case to be decided by the lower court in accordance with the Court’s Opinion.
The Future of Direct Distribution to Consumers
At the present time, out-of-state wine retailers and large-scale wineries will remain unable to ship wine directly to consumers (however certain wineries are excepted from the direct delivery ban so long “as they make no more than a minimal volume of direct deliveries,” Lebamoff Enters, slip op. at 13). As a result, wine consumers may only be able to purchase their favorite wines directly at a local store. Given the current coronavirus precautions many businesses are taking, local wine retailers may still deliver large-scale out-of-state wines to the consumers’ doors. As a result, the consumer will likely not feel much pain from the Sixth Circuit’s decision.
In March 2020, the Michigan Senate Introduced SB 819 and the House of Representatives introduced HB 5579. These bills propose to allow out-of-state wine retailers to sell directly to consumers provided that those retailers obtain a licensed from the Michigan Liquor Control Commission and take certain safety precautions to preclude the sale of alcoholic beverages to minors. To date, those bills have not seen any movement. Unless and until the Legislature amend the current statutes, consumers will continue to only be able to purchase wine from retailers with a physical presence in Michigan.
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Benjamin Shipper and Jason Canvasser are attorneys with Clark Hill.
