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7th Circuit revives Indiana wine retailer’s challenge to Illinois liquor laws

November 30, 2018

Finding the arguments needed to be allowed to ferment a little while longer, the 7th Circuit Court of Appeals has returned a dispute involving an Indiana wine retailer and Illinois’ liquor laws back to the district court for further proceedings.

The case, Lebamoff Enterprises, Inc., et al. v. Bruce V. Rauner, et al. and Wine & Spirits Distributors of Illinois, 17-2495, raises the oft-asked question of how far states can go under the 21st Amendment in regulating alcohol within their borders. Illinois uses a three-tiered liquor licensing system which includes a provision that prohibits out-of-state retailers from shipping liquor to residents in the Land of Lincoln.

That provision is now being challenged. Lebamoff Enterprises and co-owner Joseph Doust, which operate a wine store in Fort Wayne, are among the plaintiffs in the lawsuit. They argued Illinois’ prohibition violates the Commerce Clause and the Privileges and Immunities Clause of the U.S. Constitution. Illinois countered that the restrictions are within the powers granted to states by the 21st Amendment and are necessary to protect the health and well-being of state residents.

The U.S. District Court for the Northern District of Illinois, Eastern Division, viewed the complaint as challenging Illinois’ three-tiered system and granted the motion to dismiss with prejudice. However, the 7th Circuit reversed, finding the decision was served too quickly.

In fact, the appellate panel said the district court erred by not inquiring further into Illinois’ reasoning for treating out-of-state retailers differently.

“…(T)he Illinois statute itself shows why evidence is crucial to evaluate the constitutionality of the statute,” Chief Judge Diane Wood wrote for the court. “The interstate shipment provision decries ‘direct marketing’ of liquor as a ‘serious threat’ not only to the health of state residents, but also ‘to the economy of this State.’ …The first reason touches the core of the Twenty-first Amendment, while the second smacks of protectionism.”

The 7th Circuit said the central question to this case was whether the 21st Amendment saves Illinois’ restrictions on out-of-state retailers. To find the answer, the appellate panel undertook an exhaustive examination of Granholm v. Heald, 544 U.S. 460 (2005), in which the U.S. Supreme Court found Michigan and New York laws preventing out-of-state wineries from shipping directly to consumers violated the Commerce Clause.

Courts have split over the reading of Granholm, the Chicago circuit court noted. Illinois echoed the 2nd and 8th circuits by focusing on a section in Granholm where the Supreme Court concluded that “(s)tate policies are protected under the Twenty-first Amendment when they treat liquor produced out of state the same as its domestic equivalent.”

Pointing to its own ruling in Indiana’s long fight over restrictions on cold beer sales, the 7th Circuit rejected Illinois’ argument. Citing Ind. Petroleum Marketers & Convenience Store Ass’n V. Cook, 808 F.3d 318, 321-22 (7th Cir. 2015) – which upheld Indiana’s law allowing only liquor stores to sell beer cold – the appellate panel found Illinois’s interpretation of Granholm fails to read the Supreme Court’s opinion as a whole.

“The better understanding of Granholm is that it simply reaffirmed the position first announced in (Bacchus Imports, Ltd. v. Dias, 468 U.S. 263 (1984)),” Wood wrote. “As the Fourth Circuit summarized (in Brooks v. Vassar, 462 F.3d at 354), ‘these cases stand for the proposition that a State’s regulation of the transportation, importation, and use of alcoholic beverages in the State is protected by the Twenty-first Amendment, but economic protectionism is not… .’”

The 7th Circuit remanded Lebamoff for further proceedings.

Yet, the 7th Circuit acknowledged, a case brewing is before the U.S. Supreme Court that could bring more difficulties for the plaintiffs in Lebamoff. The dispute at the Supreme Court comes from the 6th Circuit, Tennessee Wine & Spirits Retailers Association v. Blair, 17-5552, and is scheduled for oral arguments Jan. 16, 2019. The central question is whether the 21st Amendment gives states the power to regulate liquor sales by granting retail or wholesale licenses only to entities that have resided in-state for a set period of years.

Indiana and Illinois have both joined 32 other states and the District of Columbia in an amicus brief supporting Tennessee’s right to impose restrictions on out-of-state businesses selling alcohol inside its borders. They argued the regulation is not driven by economic protectionism but rather by the states’ interests in avoiding “the evils” of tied houses, as well as protecting the public health and safety and ensuring alcohol retailers have a connection to the local communities they serve.

“It is quite possible that the Court’s disposition of Tennessee Wine will affect the issue now before us,” Wood wrote. “But the question in that case differs from the one now before us, and these differences often matter to the analysis. Our cases involved the ability of companies to ship alcoholic beverages to consumers in Illinois; it does not directly address licensure for retail or wholesale establishments.”

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