Lebamoff Enters., Inc. v. Rauner

909 F.3d 847

LEBAMOFF ENTERPRISES, INC., et al., Plaintiffs-Appellants,

v. Bruce V. RAUNER, et al., Defendants-Appellees,andWine & Spirits Distributors of Illinois, Intervening Defendant-Appellee.

No. 17-2495

United States Court of Appeals, Seventh Circuit.

Argued February 16, 2018

Decided November 28, 2018

James A. Tanford, Attorney, Law Office of James A. Tanford, Bloomington, IN, Robert David Epstein, Attorney, Epstein Cohen Seif & Porter, LLP, Indianapolis, IN, for Plaintiffs–Appellants.

Sarah A. Hunger, Attorney, Office of the Attorney General, Civil Appeals Division, Chicago, IL, for Defendants–Appellees.

Richard J. Prendergast, Attorney, Richard J. Prendergast, Ltd., Chicago, IL, for Intervenor–Appellee.

Before Wood, Chief Judge, and Kanne and Rovner, Circuit Judges.

Wood, Chief Judge.

The Twenty-first Amendment to the U.S. Constitution brought Prohibition to an end with a compromise: section 1 repeals the Eighteenth Amendment, but section 2 hands some power back to the states insofar as it forbids the "transportation or importation" of liquor into a state in violation of that state’s law. This post-Prohibition compromise gives the states greater leeway to regulate alcoholic beverages than they enjoy with respect to any other product. But the Supreme Court has decided that this leeway is not boundless. Drawing lines that are sometimes difficult to follow, it has decreed that states may not infringe upon other provisions of the Constitution under the guise of exercising their Twenty-first Amendment powers.

In recent years, there has been considerable litigation over the proper boundary between lawful exercise of Twenty-first Amendment powers and unlawful economic protectionism. Indeed, the Supreme Court now has before it a case posing the question whether the Twenty-first Amendment permits states to regulate liquor sales by limiting retail and wholesale licenses to persons or entities that have resided within the state for a specified time. See Tennessee Wine & Spirits Retailers Ass'n v. Byrd , No. 18-96, cert. granted , ––– U.S. ––––, 139 S.Ct. 52, ––– L.Ed.2d –––– (2018).

It is quite possible that the Court’s disposition of Tennessee Wine will affect the issue now before us. But the question in that case differs from the one now before us, and these differences often matter to the analysis. Our case involves the ability of companies to ship alcoholic beverages to consumers in Illinois; it does not directly address licensure for retail or wholesale establishments. Illinois allows retailers with an in-state physical presence to ship alcoholic beverages to consumers anywhere within Illinois. The state refuses, however, to give out-of-state businesses the opportunity even to apply for a similar shipping license. The plaintiffs argue that this difference in treatment violates the Commerce Clause and Privileges and Immunities Clause of the Constitution. Illinois responds that these restrictions fall within its reserved powers under the Twenty-first Amendment and in any event are necessary to protect its legitimate interests in the health and well-being of Illinois residents. The district court accepted Illinois’s reasoning and dismissed the case with prejudice. We conclude that it was too quick to do so in the face of material contested issues about the necessity for and justifications behind the Illinois statute. We therefore reverse, but with the caveat that there are other aspects of the Illinois law—not before us at present—that will be difficult for plaintiffs to surmount if Tennessee Wine does not come out in their favor.

I

The Illinois Liquor Control Act of 1934, 235 ILCS 5/1-1, et seq. , subject to some exceptions not pertinent here, requires any person who sells or transports alcohol in the state to obtain a license from the Illinois Liquor Control Commission. 235 ILCS 5/2-1. Like most states, Illinois divides merchants into three tiers. Licensed producers (tier 1) sell to licensed distributors (tier 2), who then sell to licensed retailers (tier 3), who in turn sell to consumers. Each tier is heavily regulated. Various specialized licenses are available on all three tiers of the system, and many of those licenses are exclusive, meaning that they preclude the holder from obtaining different types of licenses within the system. See 235 ILCS 5/5-1. The strict separation between license holders on each tier of the system was originally seen as part of a broader set of rules preventing so-called tied houses, which were vertically integrated organizations. See Federal Alcohol Admin. Act, sec. 5(b), 27 U.S.C. § 205(b). (This law reflected broader hostility to vertical arrangements that has since been abandoned by the Supreme Court. See, e.g., Leegin Creative Leather Prods., Inc. v. PSKS, Inc. , 551 U.S. 877, 127 S.Ct. 2705, 168 L.Ed.2d 623 (2007).)

The Illinois statute bars anyone from shipping or transporting "any alcoholic liquor from a point outside this State to a person in this State who does not hold a manufacturer’s, distributor’s, importing distributor’s, or non-resident dealer’s license issued by the Liquor Control Commission." 235 ILCS 5/6-29.1(b). Put more simply, subject to certain exceptions, any alcohol shipped to Illinois must go through a distributor on the second tier of the three-tier system. Additionally, the out-of-state shipper must itself be licensed in Illinois. See 235 ILCS 5/2-1 ; Ill. Admin. Code tit. 11, § 100.480(a) ("[N]o person shall import alcoholic liquor into this State for a non-personal or commercial use without first obtaining a license to import issued by the Commission."). These restrictions ensure that all liquor sold to consumers at tier three is first funneled through the top two tiers. See Granholm v. Heald , 544 U.S. 460, 489, 125 S.Ct. 1885, 161 L.Ed.2d 796 (2005).

Licensees at the third tier—retail—must have a physical location in Illinois. 235 ILCS 5/6-2(a)(1) ; see also 235 ILCS 5/6-29.1(b) (prohibiting "the shipping or transportation of any alcoholic liquor from a point outside this State to a person in this State" who does not hold a valid Illinois license). A retailer’s license allows "the licensee to sell and offer for sale at retail, only in the premises specified in the license, alcoholic liquor for use or consumption, but not for resale in any form." 235 ILCS 5/5-1(d). Section 5-1(d) provides that "[n]othing in Public Act 95-634 [now codified at section 6-29.1(b) ] shall deny, limit, remove, or restrict the ability of a holder of a retailer’s license to transfer, deliver, or ship alcoholic liquor to the purchaser for use or consumption subject to any applicable local law or ordinance." 235 ILCS 5/5-1(d) (emphasis added). In other words, Illinois-licensed retailers may ship to customers statewide, unless local law stands in the way. Taken as a whole, Illinois’s laws establish the difference in treatment that is at issue in this suit: in-state retailers can obtain a license to ship products to Illinois consumers, but out-of-state retailers cannot, for the simple reason that they are out-of-state and so by definition do not satisfy the physical-presence requirement.

The plaintiffs filed this suit in 2016, contending that the Illinois statutory scheme violates both the Commerce Clause and Privileges and Immunities Clause by discriminating against out-of-state economic interests. Two of them—Lebamoff Enterprises and its co-owner Joseph Doust—operate a wine store in Fort Wayne, Indiana. Lebamoff says that it would obtain a license to make direct shipments to Illinois residents if it were allowed to do so. The third plaintiff, Irwin Berkley, is an Illinois resident who is a regular purchaser of fine wine; he complains that his access to rare wines is curbed by the Illinois statutory scheme. Without traveling outside of the state, he is limited to whatever the Illinois retailers can send him. Consumers are often forced to travel to New York or California in order to obtain access to the full panoply of wines available from specialized retailers.

The state defendants promptly moved to dismiss. The district court viewed the complaint as a challenge to Illinois’s three-tier system writ large and granted the motion, dismissing the case with prejudice. The plaintiffs now appeal both the district court’s decision dismissing the case and its denial of leave to amend the complaint. Because the only valid basis for the district court’s denial of leave to amend was futility, we consider both decisions de novo , Runnion ex rel. Runnion v. Girl Scouts of Greater Chi. & Nw. Ind. , 786 F.3d 510, 524 (7th Cir.2015).

II

We start with the relation between the Commerce Clause and the Twenty-first Amendment. The Commerce Clause grants Congress the power to "regulate Commerce ... among the several States." U.S. CONST. Art. 1, § 8, cl. 3. The positive grant of power implies that "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.’ " Granholm , 544 U.S. at 472, 125 S.Ct. 1885 (quoting Ore. Waste Sys., Inc. v. Dep't of Envtl. Quality of Ore. , 511 U.S. 93, 99, 114 S.Ct. 1345, 128 L.Ed.2d 13 (1994) ). Laws that directly discriminate against interstate commerce are "generally struck down ... without further inquiry," while those that only indirectly affect interstate commerce are subject to a balancing test. Lebamoff Enters., Inc. v. Huskey , 666 F.3d 455, 460 (7th Cir.2012) (quoting Granholm , 544 U.S. at 487, 125 S.Ct. 1885 ). The plaintiffs argue that the Illinois law falls into the former camp and thus must be struck down out of hand.

The evident problem with their argument is that this is not a pure Commerce Clause case. It also involves the Twenty-first Amendment, which qualifies the Commerce Clause. Section 2 of the Twenty-first Amendment states that "[t]he transportation or importation into any State, Territory, or possession of the United States for delivery or use...