Is the 21st Amendment a Free Pass for Liquor Protectionism?

Tennessee alcohol merchants are asking the Supreme Court to uphold an absurd residency requirement that shields them from competition.


Institute for Justice

If you want to sell liquor in Tennessee, a state law requires that you live there for at least two years before seeking a license. And if you want to renew that one-year license after it expires, you need to show that at some point you lived in Tennessee for at least 10 consecutive years. On Wednesday, the 100th anniversary of the 18th Amendment's ratification, two lawyers told the Supreme Court those blatantly protectionist rules are constitutional thanks to the 21st Amendment, which repealed the 18th but recognized that states retained the authority to ban alcohol within their borders.

Notably, neither of those lawyers represented Tennessee, which stopped enforcing the residency requirements after the state's attorney general concluded they were unconstitutional. A federal judge and an appeals court agreed, and now the Tennessee Wine and Spirits Retailers Association (TWSRA) is asking the Supreme Court to overrule them. Shay Dvoretzky, the TWRSA's lawyer, was joined on Wednesday by Illinois Solicitor General David Franklin, speaking for his state and 34 others. Carter Phillips represented the respondents, who include the owners of a Memphis liquor store they are not allowed to operate because they recently moved there from Utah.

Dvoretzky and Franklin both argued that Tennessee does not need a plausible public health or safety justification for what amounts to a 12-year residency requirement for liquor retailers. Franklin even conceded that "it's hard to see a rational basis" for that rule, which "seems like a trap for the unwary." But he agreed with Dvoretzky that the rationale for the regulation does not matter under the Commerce Clause, because "the 21st Amendment gives states virtually complete control over how to structure their domestic liquor distribution systems."

When it comes to alcohol, Dvoretzky and Franklin said, the ordinary "dormant Commerce Clause" analysis, which frowns on economic regulations that discriminate against people from other states, does not apply at all. That means courts should uphold a discriminatory alcohol regulation even when its defenders forthrightly admit that it serves no purpose other than shielding entrenched interests like the merchants represented by the TWRSA from competition.

Justice Brett Kavanaugh pushed back on this reading of the 21st Amendment, the relevant provision of which says "the transportation or importation into any State…for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited." On its face, Tennessee's 12-year residency requirement for retailers has nothing to do with importing prohibited liquor into the state. "When you say 'virtually complete authority,'" Kavanaugh said, "the text of the 21st Amendment does not support that, as I read it….It's talking about the transportation or importation into any state. And why isn't that most naturally read to allow states to remain dry and, therefore, ban transportation or importation, but not to otherwise impose discriminatory or…protectionist regulations?"

Justice Samuel Alito was similarly skeptical. "The 21st Amendment is about the transportation or importation of alcohol into a state," he told Dvoretzky. "How do you get from there to a durational residency requirement that is imposed on the owner of a retail outlet in the state?"

The Supreme Court has already said the 21st Amendment is not a free pass for alcohol-related protectionism. In Bacchus v. Dias (1984), the Court rejected an excise tax exemption designed to favor local distillers in Hawaii over out-of-state competitors, and in Granholm v. Heald (2005) it said Michigan and New York could not constitutionally prohibit out-of-state wineries from shipping their products directly to consumers while allowing in-state wineries to do so. The TWRSA wants the justices to read those precedents as applying only to discrimination against manufacturers.

"I know you want to limit it to producers," Justice Sonia Sotomayor said to Dvoretzky, "but that's not the way that Granholm talked about…this issue." She also noted that if the Commerce Clause has no relevance in cases involving state alcohol regulation, as Dvoretzky maintained, Bacchus and Granholm must have been wrongly decided.

Justice Samuel Alito asked Dvoretzky to imagine "a grandfathers clause" that says "you can't get a liquor license in Tennessee unless your grandparents were Tennessee residents." Dvoretzky said that would also be constitutional, because alcohol regulations are not subject to Commerce Clause scrutiny, a position that is inconsistent with what the Court held in Bacchus and Granholm.

Phillips, the lawyer representing the respondents, urged the justices to follow through on the logic of those precedents. "There is no rational basis for the two-year ban that they've put in place here," he said. "The Tennessee attorney general himself has twice looked at this ban and said it doesn't remotely serve any purpose that's designed under the 21st Amendment when we're dealing with alcohol or public safety or public health or anything else. It's only designed to exclude us."

That argument seemed to resonate with several justices, but there was also concern that overturning Tennessee's rule would invite challenges to other longstanding aspects of state alcohol regulation, including the "three-tier system" of segregated producers, wholesalers, and retailers. The Court has repeatedly said that system is within the authority granted by the 21st Amendment, even though it discriminates against out-of-state businesses in some ways.

Justice Neil Gorsuch suggested that an "Amazon of alcohol" could argue that states violate the Commerce Clause when they stop online retailers from selling beer, wine, and liquor directly to consumers. Phillips said his clients have no interest in challenging the three-tier system, but that did not really answer the question of whether the principle on which they are relying implies that courts should overturn other stupid, anti-competitive restrictions on the distribution of alcoholic beverages. Would that be such a bad thing?