Lebamoff Enters. Inc. v. Whitmer

956 F.3d 863

LEBAMOFF ENTERPRISES INC.; Joseph Doust; Jack Stride; Jack Schulz; Richard Donovan, Plaintiffs-Appellees,

v.Gretchen WHITMER ; Dana Nessel ; Pat Gagliardi, Defendants-Appellants (18-2199),

Michigan Beer & Wine Wholesalers Association, Intervenor Defendant-Appellant (18-2200).

Nos. 18-2199/2200

United States Court of Appeals, Sixth Circuit.

Argued: March 12, 2020

Decided and Filed: April 21, 2020

SUTTON, Circuit Judge.

The parties agree that the Twenty-first Amendment allows Michigan to distribute alcohol within its borders solely through a three-tier system, one composed of producers, wholesalers, and retailers. And the parties agree that Michigan may impose all manner of regulations on its wholesalers (e.g. , that they be in the State, adhere to minimum prices, and decline to offer volume discounts) as well as on its retailers (e.g. , that they be present in the State, sell only within the State, and comply with health-and-safety rules). What separates the parties is whether Michigan may permit its retailers to offer at-home deliveries within the State while denying the same option to an Indiana retailer who does not have a Michigan retail license. Because the Twenty-first Amendment permits Michigan to treat in-state retailers (who operate within the three-tier system) differently from out-of-state retailers (who do not), we uphold the law.

I.

Some history is in order. Before Prohibition, alcohol producers typically sold their beer and liquor through "tied-house" saloons. They set up saloonkeepers with a building and equipment in exchange for promises to sell only their drinks and to meet minimum sales goals. The system efficiently brought alcohol to market, keeping prices low and choices aplenty. But not all efficient markets are useful markets. You can have too much of a good thing. Excessive alcohol consumption came with costs for individuals and the public—addiction, crime, violence, and family troubles among them. As "absentee owners," the producers in the tied-house system rarely had to come to grips with these costs: They "knew nothing and cared nothing about the community." Raymond B. Fosdick & Albert L. Scott, Toward Liquor Control 33 (Ctr. for Alcohol Policy 2011) (1933). When this market structure approached its peak, the Supreme Court remarked that "[t]he statistics of every state show a greater amount of crime and misery attributable to the use of ardent spirits obtained at these retail liquor saloons than to any other source." Crowley v. Christensen , 137 U.S. 86, 91, 11 S.Ct. 13, 34 L.Ed. 620 (1890).

Extreme problems sometimes prompt extreme solutions. With ratification of the Eighteenth Amendment, the American people chose national prohibition as the way to address these problems. This experiment solved some problems but generated others. With ratification of the Twenty-first Amendment, the people brought this thirteen-year trial to a close. While Prohibition prompted a significant expansion of the federal government’s role in law enforcement, see generally Lisa McGirr, The War on Alcohol: Prohibition and the Rise of the American State (2015), its demise returned control over alcohol regulation to the States. Section 2 of the Twenty-first Amendment delegates to each State the choice whether to permit sales of alcohol within its borders and, if so, on what terms and in what way. Some States initially kept a ban on alcohol in place. Others permitted it through highly regulated markets to prevent the problems associated with tied-house saloons from resurfacing. To tighten the reins, States developed "three-tier" systems for alcohol distribution. Tenn. Wine & Spirits Retailers Ass’n v. Thomas , ––– U.S. ––––, 139 S. Ct. 2449, 2463 n.7, 204 L.Ed.2d 801 (2019). To this day, most States retain three-tier systems. Count Michigan as one of them.

In a three-tier system, the State 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 make final sales to consumers. To avoid the tied-house system’s "absentee owner" problem, businesses at each tier must be independently owned, and no one may operate more than one tier. See Mich. Comp. Laws § 436.1603(4), (13). States also restrict cooperation and joint marketing efforts that have similar effects.

Wholesalers play a key role in three-tier systems. Typically few in number and often state-owned, they are the in-state path through which all alcohol passes before reaching consumers. That allows States, if they wish, to control the amount of alcohol sold through price controls, taxation, and other regulations. Michigan, for example, imposes minimum prices and prohibits wholesalers from offering volume discounts or selling on credit. See, e.g. , id. § 436.2013. When it comes to liquor (though not wine and beer), the State is the wholesaler in Michigan. See id. § 436.1231.

Michigan is not the strictest State when it comes to alcohol distribution. Take Utah. For all alcoholic products save light beer, the State is the sole importer and main retailer, making it essentially a two-tier system. See Utah Code Ann. §§ 32B-2-202, 204, 501; id. § 32B-7-202.

Whether in Michigan, Utah, or elsewhere, this is not Adam Smith’s idea of an efficient market. Then again, efficiency is not the goal of the Twenty-first Amendment, whether in the form of easy-to-get alcohol or easy-to-pay-for alcohol. The Amendment gave each State the choice whether to allow any alcohol to be sold within its borders, to allow alcohol to be sold through a market heavily regulated by the visible hand of the State, or to allow alcohol to be sold with little regulation at all.

Against this backdrop, Michigan recently amended its Liquor Control Code. The law allows in-state retailers to deliver directly to consumers using state-licensed "third party facilitators" or common carriers like FedEx or UPS. 2016 Mich. Pub. Acts 520, § 203(3), (15).

In response, Lebamoff Enterprises, a wine retailer based in Fort Wayne, Indiana, along with several Michigan wine consumers filed this lawsuit. They allege that the new law violates the Commerce Clause and the Privileges and Immunities Clause. The Michigan Beer & Wine Wholesalers Association intervened as a defendant.

Both sides moved for summary judgment. The court ruled for the claimants. In choosing a remedy for the violation, the court extended delivery rights to out-of-state retailers rather than returning matters to the no-delivery status quo. Michigan obtained a stay pending appeal.

II.

A.

Resolution of this case turns on the accordion-like interplay of two provisions of the United States Constitution. One is the Commerce Clause, which gives Congress the power "[t]o regulate Commerce ... among the several States." U.S. Const. art. I, § 8, cl. 3. The Clause grants Congress power to preempt or permit state laws that interfere with interstate commerce, and it impliedly "prohibits state laws," as determined by the federal courts, "that unduly restrict interstate commerce." Tenn. Wine & Spirits , 139 S. Ct. at 2459. Under the implied prohibition, if a state law discriminates against "out-of-state goods or nonresident economic actors," it may survive only if tailored to advance a legitimate state purpose. Id. at 2461.

The other provision is the Twenty-first Amendment. While the Commerce Clause grants Congress power to eliminate state laws that discriminate against interstate commerce, the Twenty-first Amendment grants the States the power to regulate commerce with respect to alcohol. Section 2 of the Amendment bars "[t]he transportation or importation into any State, Territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof." U.S. Const. amend. XXI, § 2. The section gives the States broad latitude to regulate the distribution of alcohol within their borders. See North Dakota v. United States , 495 U.S. 423, 432–33, 110 S.Ct. 1986, 109 L.Ed.2d 420 (1990) (plurality opinion); see also id. at 447–48, 110 S.Ct. 1986 (Scalia, J., concurring in the judgment). Indeed, had Congress (as opposed to the people through the ratification process) enacted this exact law, it is doubtful there would be any role for the federal courts to play. When faced with a dormant Commerce Clause challenge to an alcohol regulation, as a result, we apply a "different" test. Tenn. Wine & Spirits , 139 S. Ct. at 2474. Rather than skeptical review, we ask whether the law "can be justified as a public health or safety measure or on some other legitimate nonprotectionist ground." Id. But 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. Id.

At the outset, it’s worth acknowledging that case law authorizes several features of Michigan’s system for regulating the distribution of alcohol within its borders.

The courts have frequently said that the Twenty-first Amendment permits a three-tier system of alcohol distribution, and the Commerce Clause does not impliedly prohibit it. Nothing stops States, the Court has explained, from "funnel[ing] sales through the three-tier system," a practice that is "unquestionably legitimate." Granholm v. Heald , 544 U.S. 460, 489, 125 S.Ct. 1885, 161 L.Ed.2d 796 (2005) (quotation omitted); see Tenn. Wine & Spirits , 139 S. Ct. at 2471–72 ; Cal. Retail Liquor Dealers Ass’n v. Midcal Aluminum, Inc. , 445 U.S. 97, 110, 100 S.Ct. 937, 63 L.Ed.2d 233 (1980). Granholm , a case from Michigan, left no drama about the issue: "States can mandate a three-tier distribution scheme in the exercise of their authority under the Twenty-first Amendment." 544 U.S. at 466, 125 S.Ct. 1885. We have echoed the point: A State’s "decision to adhere to a three-tier distribution system...