The Supreme Court Said States Can't Discriminate in Alcohol Sales. They're Doing It Anyway.

Two decades after Granholm v. Heald was supposed to end protectionist shipping laws, states and lower courts continue to undermine the decision.

This month marks the 20th anniversary of the seminal Granholm v. Heald case, in which the United States Supreme Court struck down protectionist alcohol shipping laws that discriminated against out-of-state wineries. Seen at the time as a harbinger of a truly national e-commerce marketplace for alcoholic beverages, Granholm continues to be treated more like a legal inconvenience than a binding precedent by lower courts.

In Granholm, numerous wineries challenged a Michigan law that allowed in-state wineries to ship directly to state residents but required out-of-state wineries to sell their products through wholesalers. Because the case was a consolidation of several legal challenges, it also involved a New York law that only permitted out-of-state wineries to engage in direct-to-consumer shipping if they had a "branch factory, office or storeroom within the state of New York."

In a 5–4 decision, the Supreme Court struck down both laws as a violation of the so-called "dormant Commerce Clause," which establishes the principle that state governments cannot blatantly favor in-state economic interests by discriminating against out-of-state economic actors.

Importantly, the law ushered in a host of state-level legislative victories that allowed wineries to ship their products directly to their customer base, thereby circumventing the notorious three-tier system of alcohol regulation.

Despite nearly always being referred to as a "landmark" ruling, Granholm has been treated more on par with an obscure 19th-century SCOTUS case that has long since been reversed. In the years immediately following Granholm, the so-called Arnold's Wine line of cases—named after the Second Circuit's Arnold's Wines, Inc. v. Boyle case—came out, in which lower federal courts effectively limited the Supreme Court's Granholm decision to alcohol producers (not retailers).

Other federal courts rejected such a cramped reading of the Granholm precedent, and eventually, the dispute forced the Supreme Court to weigh in again in the 2019 case Byrd v. Tennessee Wine & Spirits Retailers Association. In Tennessee Wine, the Court held—this time by a 7–2 vote—that a Tennessee law requiring liquor store owners to have been residents of the state for at least two years before applying for a license was unconstitutional. Again, the rationale was based on the fact that states were not permitted to discriminate against out-of-state economic interests unless there was a proper health and safety reason to do so.

As attorney Sean O'Leary put it, the Court's majority opinion—penned by Justice Samuel Alito—"put to rest any ambiguity on the reach of Granholm." Except, somehow, it apparently didn't, because lower courts almost immediately started to ignore the Court once again.

Lower courts have coalesced around what has been called the Tennessee Wine Two-Step Test: 1. Does the alcohol law at issue either facially or effectively discriminate against out-of-state economic interests? 2. If so, is the discrimination still permissible by serving a "legitimate, non-protectionist interest" (such as protecting health and safety)?

Lower courts are creatively using these questions to essentially manufacture workarounds for both Granholm and Tennessee Wine.

In 2022, a panel of the 4th U.S. Circuit Court of Appeals upheld a North Carolina law that allowed in-state retailers to ship wine to North Carolina consumers but forbade out-of-state retailers from doing the same. Although the court agreed that the law at issue was clearly discriminatory against out-of-state economic interests, it seized upon the second prong of the two-step, holding that a state protecting its system of alcohol regulation was in and of itself "a legitimate non-protectionist ground" for the law.

The 9th Circuit recently went even further. Hearing a challenge to an Arizona law that requires wine retailers to have an in-state physical presence in order to engage in interstate direct-to-consumer shipments within the state, the court ruled that the law wasn't even discriminatory. Under the court's reasoning, "setting up a physical storefront in Arizona is not a 'per se burden on out-of-state companies'" because the ability to establish such a storefront is based "on a company's resources and business model, not its citizenship or residency."

The 9th Circuit's rationale is already spreading, with a district court in Washington State using the decision as a basis to now conclude that a Washington law that discriminates against out-of-state distilleries in favor of in-state distilleries is similarly permissible.

Lost in all the legal slicing and dicing of these post-Granholm and post-Tennessee Wine cases is the simple reality that they're clearly ignoring the main import of these decisions. As Alito noted in Tennessee Wine, "the Commerce Clause did not permit the States to impose protectionist measures clothed as police-power regulations."

Unfortunately, that appears to be exactly what states are doing—and they're being readily rubber-stamped by willing federal judges. "The decisions keep getting stranger and stranger," as O'Leary put it in an interview with Wine-Searcher. "I really thought this issue was put to rest when Alito wrote Tennessee Wine. He wrote that Granholm applies to everyone. It was a 7–2 ruling. I thought that was the end of it."

States embracing protectionism and clearly thwarting previous rulings may force the Supreme Court to step in once again.