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From Antitrust Law Daily, February 22, 2018

Durational-residency requirement for Tennessee liquor retailers unconstitutional

By Nicole D. Prysby, J.D.

Tennessee’s two-year residency requirement for liquor retailers is facially discriminatory and there was no evidence that the state could not achieve its goals through nondiscriminatory measures, held the U.S. Court of Appeals in Cincinnati in finding the law unconstitutional. The durational-residency law applied to individuals and corporations alike, and prohibited a license for a corporation if any officer, director, or stockholder would be ineligible to receive a retailer’s license. The court found that the state could have achieved its objective of ensuring the health and safety of its citizens through nondiscriminatory means, such as requiring a retailer’s general manager to be a state resident or requiring the posting of a bond. And the law was not immunized under the Twenty-first Amendment, because it did not relate to the flow of alcoholic beverages within the state, but to the flow of people (Byrd v. Tennessee Wine and Spirits Retailers Assoc., February 21, 2018, Moore, K.).

Background. Under Tennessee statutory law, there is a three tier system for distribution of alcoholic beverages: manufacturer, wholesaler, and retailer. The state imposes a two-year in-state residency requirement to receive a retailer license. To renew such a license, there is a ten-year residency requirement. The restrictions apply to businesses as well as individuals. For a corporation, a license is prohibited if any officer, director, or stockholder would be ineligible to receive a retailer’s license. A retail corporation that did not meet the requirements sought a license and the district court granted summary judgment for the retailer, finding that the state’s durational-residency requirements violate the dormant Commerce Clause.

Twenty-first Amendment analysis. On appeal, the Sixth Circuit first found that the Twenty-first Amendment does not immunize the state’s durational-residency requirements. The court discussed recent cases on whether the Twenty-first Amendment automatically immunizes a state law regarding retailers and wholesalers of alcoholic beverages, and concluded that it does not. The U.S. Supreme Court has discussed the relationship between the dormant Commerce Clause and the Twenty-first Amendment in the context of producers, and there is no indication that the Court’s analysis would be any different for wholesalers or retailers.

Therefore, to determine whether the Twenty-first Amendment immunizes the state law from scrutiny, the court must consider whether the interests implicated by the state law are so closely related to the powers reserved by the Twenty-first Amendment that the state law may prevail, notwithstanding a conflict with federal policies. Other courts have found that imposing a durational-residency requirement is not essential to the three-tier system (although requiring retailers or wholesalers to be within the state may be). A three-tier system may function without durational-residency requirements. The durational-residency requirement in this case does not relate to the flow of alcoholic beverages within the state, but to the flow of individuals who can and cannot engage in certain economic activities. Therefore, the Twenty-first Amendment does not immunize the state’s requirement from scrutiny under the dormant Commerce Clause.

Dormant Commerce Clause. The court found that the Tennessee requirements are facially discriminatory in that they prevent out-of-state residents form obtaining retail licenses and protect in-state residents who are retailers, and the state’s objectives could be achieved with a reasonable nondiscriminatory alternative. The state claimed that the requirements protect the health and safety of Tennessee citizens and that they needed a higher level of oversight and control over liquor retailers. But there was no evidence that the goals could not be achieved through nondiscriminatory means, such as requiring a retailer’s general manager to be a resident of the state, requiring all retailers to post a bond, or creating a database to monitor liquor retailers. Therefore, the court found, the durational-residency requirements are unconstitutional and should be severed from the rest of the statute.

Dissent. The dissent would have upheld part of the law, and concluded that because tiered distribution systems are legitimate, the state must be given flexibility to determine the requisite degree of in-state presence required to participate in the system. Because retailers are the closest to the localities in which alcohol is sold, the residency requirement ensures that the retailers will be knowledgeable about the communities they serve. The dissent did agree that two aspects of the law were unconstitutional: applying the residency requirement to 100% of a retailer’s stockholders and the 10-year residency requirement for license renewal.

The case is No. 17-5552.

Attorneys: Sarah Campbell, Office of the Attorney General, for Clayton Byrd. Richard L. Colbert (Kay, Griffin, Enkema & Colbert) for Tennessee Wine and Spirits Retailers Association.

Companies: Tennessee Wine and Spirits Retailers Association

MainStory: TopStory FranchisingDistribution KentuckyNews MichiganNews OhioNews TennesseeNews

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