Hospitality Law
The Continuing Effects Of The Supreme Court’s Granholm Decision on Beverage Alcohol
Licensing
By Deborah Skakel, partner, Dickstein Shapiro LLP
As we approach the 80th anniversary of the repeal of Prohibition, the ratification of the 21st Amendment to the U.S.
Constitution, and the states’ establishment of what is known as the “three-tier system” for the sale and distribution
of beverage alcohol, the federal courts and state legislatures continue to grapple with the issues arising from a 21st
century industry operating within an early 20th century distribution system. In particular, while the U.S. Supreme
Court’s 2005 landmark decision in Granholm v. Heald (1) provided substantive directives and substantial guidance
concerning the constitutional issues surrounding “direct shipping,” Granholm also spawned controversial legislative
initiatives and further litigation addressing its scope and meaning. More recently, the principles of Granholm
articulated in the direct shipping context have been applied in litigation challenging state residency requirements.
This article will discuss those fundamental principles of Granholm and their evolution, the effects of which continue
to be felt by the wholesale and retail tiers.
The “Three-Tier System”
Ms. Skakel
The structure for the sale and distribution of alcohol adopted by the majority of the states in the wake of the
ratification of the 21st Amendment was the “three-tier system,” which the Supreme Court in Granholm defined as
follows:
Producers or distillers of alcoholic beverages, whether located in state or out of state, generally may sell only to licensed in-state
wholesalers. Wholesalers, in turn, may sell only to in-state retailers. Licensed retailers are the final link in the chain, selling alcoholic
beverages to consumers at retail locations and, subject to certain restrictions, through home delivery(2).
Granholm’s Fundamentals
Granholm addressed the initial, basic direct shipping questions: Does a state law that allows all of its in-state wineries to sell and ship
directly to in-state consumers, while prohibiting all out-of-state wineries from obtaining a license to do so, violate the U.S. Constitution’s
Commerce Clause by discriminating against interstate commerce? If so, is that statute saved by the 21st Amendment?
In holding that the Michigan and New York statutory schemes were unconstitutional and not saved by the Twenty-first Amendment, the
Supreme Court ruled: “the three-tier system itself is ‘unquestionably legitimate’”;(3) small wineries do not produce enough wine to make it
economically feasible to operate within the three-tier system;(4) and “State policies are protected under the 21st Amendment when they
treat liquor produced out of state the same as its domestic equivalent”(5) —contrary to the Michigan and New York statutes, which were
“straightforward attempts to discriminate in favor of local producers,” violative of the Commerce Clause and not saved by the Twenty-first
Amendment.(6)
In many respects, Granholm focused on the most direct of direct shipping scenarios: all in-state producers—but no out-of-state producers
—could obtain a license to sell and ship directly to in-state consumers. As the past seven years have demonstrated, these Granholm
principles have been applied in the federal courts to scenarios beyond “straight up” direct shipping.
“To Retail” and “At Retail”
As explained in Granholm, one of the factors resulting in the “emerging and significant business” of direct shipping was the wineries’
increasing use of the internet to sell wine.(7) In Granholm and in common usage, “direct shipping” meant the remote sale by a winery to a
consumer—i.e., wine purchased online or ordered by mail or phone—combined with the shipment of the purchased product directly to
that consumer in a cross-border transaction. Using Granholm as a springboard, winery plaintiffs challenged different aspects of “direct
shipping” privileges of licensed in-state wineries:
• Statutes allowing in-state—but not out-of-state—wineries to sell and ship directly to in-state retailers (as distinct from in-state
consumers)—i.e., providing in-state wineries self-distribution rights to both on-premise (restaurants and bars) and off-premise (wine and
liquor stores) retailers.
• Statutes allowing in-state—but not out-of-state—wineries to sell from winery premises directly to a consumer (i.e., to sell “at retail”) and
to ship such purchased product to the consumer.
Lawsuits based on the out-of-staters’ lack of self-distribution rights were largely successful, with the courts noting the similarity to “‘the
discriminatory character’” of the statutory schemes in Granholm. In a newer twist, this Granholm analysis was applied in the selfdistribution privileges context—but to the privileges of a brewer.(8) Anheuser-Busch won the battle, but lost the war. Rather than extend
the self-distribution privilege to out-of-state brewers,(9) the court withdrew that privilege from the in-state brewers. Further, AnheuserBusch remained unable to proceed with its “‘significant and important business transaction’”—the acquisition of the Chicago distributor
of Anheuser-Busch products.(10)
In contrast, the “at retail” cases met with mixed results, largely based on the substantive differences among the underlying statutes in
question, such as whether the consumer had to be physically present at the time of the sale (or at least for the initial purchase) and
whether the purchased wine could be shipped to the consumer.
Granholm-Based Gallonage Cap Statutes
In the wake of Granholm, several state legislatures chose to provide direct sale and shipping rights to similarly-situated out-of-state
wineries. Within that group of states extending direct shipping rights, some—like Arizona, Massachusetts, and Kentucky—did so with
respect to small wineries only. Larger wineries which did not qualify for a direct shipping license under these “gallonage cap” provisions
argued that, while the statutes might not be discriminatory on their face (larger wineries—wherever located—were treated the same),
there was discrimination in effect because of the adverse impact on the number of larger out-of-state wineries and the amount of their
out-of-state product. Much like the “at retail” statutes, the various gallonage cap statutes fared differently in the courts.
Retail Direct
The “retail direct” litigation marked a significant change: not an out-of-state winery (producer/supplier tier), but an out-of-state retailer (the
third tier in the three-tier system) challenged the ban on direct retail sales and shipments to in-state consumers. In applying Granholm’s
analysis to the retail tier in Arnold’s Wines, Inc. v. Boyle,(11) the Second Circuit rejected the out-of-state challenge to the statutory
requirement that “all wholesalers and retailers be present in and licensed by the state” as “a frontal attack on the constitutionality of the
three-tier system itself”—an argument “directly foreclosed by the Granholm Court’s express affirmation of the legality of the three-tier
system.”(12) Unlike the challenged winery statutes in Granholm, the New York wholesaler and retailer licensing statutes treat in-state and
out-of-state liquor “evenhandedly under the state’s three-tier system,... compl[y] with Granholm’s nondiscrimination principle”(13) and do
not “discriminate against out-of-state products or producers.”(14)
The Fifth Circuit in the Texas retail direct case—Wine Country Gift Baskets.com v. Steen(15) — ultimately reached a comparable result
and upheld the Texas provision allowing in-state retailers to make local deliveries within their counties, but barring out-of-state retailers
from shipping to Texas, holding that local deliveries were “a constitutionally benign incident of an acceptable three-tier system” and
consistent with Granholm’s “unquestioning reference.”(16)
Granholm As Applied To Residency Statutes
More recently, Granholm’s principles have been applied in cases challenging residency statutes in Texas (imposing a one-year durational
residency requirement on both wholesale license and wine retailer license applicants) and Missouri (requiring that a corporate applicant
for a wholesale license as well as its officers, directors and majority shareholders reside in Missouri for three years prior to applying).
Relying on Granholm, the federal courts struck down both of the Texas one-year durational residency statutes.(17) And the court in Siesta
Village Market, LLC v. Perry expressly equated the retail direct and residency analyses:
Based on the foregoing [unconstitutionality of the prohibition of out-of-state retailers direct shipping to Texas consumers], it follows
that the challenged Texas citizenship requirements are also unconstitutional as applied to retailers. If Texas cannot constitutionally
condition wine retailer direct-shipping rights on a physical presence within the state, it cannot condition qualification for TABC permits
on establishing citizenship in Texas.(18)
In doing so, the court noted that it “respectfully disagree[d]” with the Second Circuit’s decision in Arnold’s Wines, which—according to the
Northern District of Texas judge—was “based on a misreading of Granholm” and “elevates a state’s rights under the Twenty-first
Amendment to a level that improperly supersedes the dormant Commerce Clause.”(19)
Most recently, the federal court in the Western District of Missouri adopted the Second Circuit’s reading of Granholm and upheld the
Missouri residency statute in Southern Wine & Spirits of America v. Division of Alcohol & Tobacco Control:
Unlike in Granholm, Missouri’s residency requirements do not discriminate against any types of alcohol products or producers;
liquor produced out-of-state is funneled through Missouri’s three-tier system in the same fashion as its in-state equivalent. Rather, the
disparate treatment embodied in the regulations only affects wholesalers charged with transporting alcohol already lawfully present in
the State. . . . The power to structure the liquor distribution system falls clearly within the State’s “virtually complete control” under the
Twenty-first Amendment. Regulations which discriminate in favor of in-state wholesalers are an integral component of a three-tier
system, as the Granholm court acknowledged.(20)
The federal district court in Missouri thus followed the Arnold’s Wines interpretation of Granholm as distinguishing between discrimination
against out-of-state producers or products (which violated the Commerce Clause and was not sanctioned by the 21st Amendment) and
discrimination at the wholesaler or retailer tier (where such regulations were part of the three-tier system itself, treated in-state and out-ofstate products the same, and were therefore valid).(21)
Stephen Barth edited this article. Dr. Barth is an American Lawyer and Professor of Leadership and Hospitality Law at the Conrad N.
Hilton College of Hotel and Restaurant Management at the University of Houston. He is also the author of Hospitality Law and the
co-author of Restaurant Law Basics. In addition to this, he is a speaker and the Founder of HospitalityLawyer.com, the annual
Hospitality Law Conference, and the Global Congress on Travel Risk Management. His hospitality interest combined with his legal
experience has made him a pioneer in the hospitality industry, where he focuses on making hospitality law a specialty area of the
law.
References:
1. 544 U.S. 460 (2005).
2. Id. at 468-69 (citations omitted).
3. Id. at 489 (citations omitted).
4. Id. at 467-68.
5. Id. at 489.
6. Id.
7. Id. at 467.
8. Anheuser-Busch, Inc. v. Schnorf, 738 F. Supp. 2d 793 (N.D. Ill. 2010).
9. Id. at 817.
10. Id. at 795.
11. 515 F. Supp. 2d 401 (S.D.N.Y. 2007), aff’d, 571 F.3d 185 (2d Cir. 2009).
12. 571 F.3d at 190-91.
13. Id. at 191.
14. Id.
15. 612 F. 3d 809 (5th Cir. 2010).
16. Id. at 820.
17. Southern Wine & Spirits of Texas Inc. v. Steen, 486 F. Supp. 2d 626 (W.D. Tex. 2007) (wholesalers); Siesta Village Market, LLC v.
Perry, 530 F. Supp. 2d 848 (N.D. Tex. 2008), vacated sub nom., Wine Country Gift Baskets.com v. Steen, 595 F.2d 249 (5th Cir.
2010), superseded and withdrawn on reconsideration, 612 F.3d 809 (5th Cir. 2010), cert. denied, 131 S. Ct. 1602 (2011) (retailers).
18. 530 F. Supp. at 868.
19. Id. at 867 n.19.
20. No. 11-CV-04175-NKL, 2012 WL 1934408, at *4 (W.D. Mo. May 29, 2012).
21. Id.
Deborah Skakel is a partner in Dickstein Shapiro LLP’s Business Litigation Practice. Ms. Skakel’s practice focuses on a wide array of
complex civil litigation matters, representing a diverse group of both corporate and individual clients. With a significant amount of
her practice in the arbitration arena, she not only litigates sophisticated commercial cases, but also arbitrates various disputes.
Moreover, Ms. Skakel has substantive experience handling regulatory and other issues relating to the alcohol beverage industry, as
well as accounting and auditing issues, and real estate matters. Ms. Skakel can be contacted at [email protected]
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