Lebamoff Enters. v. Snyder
Lebamoff Enters. v. Snyder
Opinion of the Court
Plaintiffs-individual wine consumers (Jack Strike, Jack Schulz, and Richard Donovan), an individual wine merchant (Joseph Doust), and an Indiana corporation that operates fifteen alcohol retail stores in Indiana (Lebamoff Enterprises, Inc.)-filed this
Plaintiffs ask the Court to declare
FACTUAL BACKGROUND
The laws governing wine retailing in Michigan were amended by
The MLCC, by way of the Michigan Liquor Control Code, controls and regulates the sale and importation of alcohol through a three-tier distribution system of suppliers, wholesalers, and retailers. Licensed suppliers sell beer, wine, and mixed spirits to licensed wholesalers, who in turn sell these products to licensed retailers. Licensed retailers may only purchase wine from licensed Michigan wholesalers. Licensed retailers then sell alcohol to consumers. The MLCC exercises its powers over the three tiers of distribution to regulate the behavior of market participants. For instance, retailers are forbidden to negotiate volume discounts with wholesalers or purchases on credit. Mich. Comp. L. § 436.1609a(5) ; Mich. Admin. Code, R, 436.1625(5), 436.1726(4). Michigan also requires wholesalers to "post-and-hold" prices to police against industry favoritism or covert volume discounts. Mich. Admin. Code, R. 436.1726.
PLAINTIFFS' LAWSUIT
Plaintiffs challenge the new version of M.C.L. § 436.1203(2), as enacted on January 5, 2017. The law permits retailers who obtain specially designated merchant ("SDM") licenses to deliver wine to Michigan consumers using a common carrier, their own vehicle, or a third-party facilitator. M.C.L. §§ 436.1203(3), (12), and (15). These provisions do not apply to Lebamoff Enterprises, Inc., however, because as an "outstate seller of wine," it is ineligible to become "licensed as a specially designated merchant." M.C.L. § 436.1607(1).
Plaintiff Lebamoff Enterprises, Inc. ("Lebamoff") operates fifteen retail wine and liquor stores-called Cap n' Cork-in the Fort Wayne, Indiana area. Many of Lebamoff's customers live in cities in southwest Michigan and have requested that Lebamoff ship wine to them. (Pls.' Ex. 2 at ¶ 2). Lebamoff is unable to do so however, despite being fully equipped to ship and deliver wine. (Id. at ¶ 6). Plaintiff Joseph Doust is a wine merchant and one of the co-owners of Lebamoff Enterprises. Plaintiffs Richard Donovan, Jack Strike, and Jack Schulz are Michigan wine consumers who wish to be able to order wine from out-of-state retailers. They prefer to order wine on the internet, and they allege that many of their desired vintages are not *305available in the Michigan market. (Pls. Ex. 5, 6, & 7).
PROCEDURAL HISTORY
Plaintiffs filed a Complaint [1] on January 20, 2017 and an Amended Complaint [5] on February 6, 2017.
On March 17, 2017, the Michigan Beer & Wine Wholesalers Association moved, unopposed, to intervene as a defendant. The Court entered an Order permitting intervention [13] on April 6, 2017.
Plaintiffs filed a Motion for Summary Judgment [31] on February 28, 2018. Intervenors and the original Defendants filed Motions for Summary Judgment [33, 34] on April 2, 2018. The motions have been fully briefed, and a hearing was held before the Court on September 6, 2018.
LEGAL STANDARD
Summary judgment is appropriate "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c). Defendants bear the burden of establishing that there are no genuine issues of material fact, which may be accomplished by demonstrating that Plaintiffs lack evidence to support an essential element of their case. Celotex Corp. v. Catrett ,
ANALYSIS
A.
The Commerce Clause gives Congress the power "[t]o regulate Commerce with foreign Nations, and among the several States." U.S. Const., art. I, § 8, cl. 3. The United States Supreme Court has "interpreted the Commerce Clause to invalidate local laws that impose commercial barriers or discriminate against an article of commerce by reason of its origin or destination out of state." C & A Carbone, Inc., v. Town of Clarkstown , N.Y.,
The dormant Commerce Clause inquiry is two-fold. First, the Court must determine whether the statute at issue "directly regulates or discriminates against interstate commerce, or [whether] its effect is to favor in-state economic interests over out-of-state interests." Dep't of Revenue of Ky. v. Davis ,
*306If Plaintiffs prove that the law discriminates against interstate commerce, the law "will survive only if it advances a legitimate local purpose that cannot be adequately served by reasonable alternatives." Dep't of Revenue of Ky.,
B.
Plaintiffs have met their burden of proving that the regulatory system created by
Defendants argue that a ruling for the Plaintiffs would allow Lebamoff to do what no Michigan retailer may do: ship wine to Michigan consumers that has not passed through the Michigan three-tier system. The dormant Commerce Clause is enforced against states, however, and the constitutionality of state action is of primary concern in this case. The governing question, therefore, is whether Michigan is permitted to enforce a statute that explicitly denies out-of-state retailers a privilege available to their in-state competitors. The answer at this stage must be no, for "[s]tate laws that discriminate against interstate commerce face a 'virtually per se rule of invalidity." Granholm ,
Michigan departed from a hermetically-sealed three-tier system when it chose to permit its wine retailers to join the digital marketplace and engage in direct shipping to customers. The State created a market for Michigan consumers that implicated interstate commerce in a manner above-and-beyond that of a traditional three-tier system. These same laws then closed off this Michigan-sized portion *307of American interstate commerce to out-of-state competition. State laws that so favor in-state business presumptively violate the dormant Commerce Clause because they undermine "strong federal interests in preventing economic Balkanization." Bacchus Imps. v. Dias ,
C.
Because this case concerns the regulation of alcohol, the Court must undertake an additional step in its analysis before determining whether Defendants meet their burden on the second prong of the Commerce Clause test. The Court must determine "whether the interests implicated by a state regulation are so closely related to the powers reserved by the Twenty-first Amendment that the regulation may prevail, notwithstanding that its requirements directly conflict with express federal policies." Bacchus Imports, Ltd. v. Dias ,
Courts have interpreted the Amendment "to allow states to maintain an effective and uniform system for controlling liquor by regulating its transportation, importation, and use." Granholm ,
The question here is whether discrimination against interstate commerce on the retail tier-as opposed to the producer tier at issue in Granholm -is forbidden by the Commerce Clause or sanctioned by the Twenty-first Amendment.
Courts have answered this question in different ways. In Siesta Village Market, LLC v. Granholm ,
By contrast, the Second Circuit declined to interpret Granholm as authorizing a Commerce Clause challenge to a New York state wine retail shipment law that privileged in-state retailers.
*308Arnold's Wines, Inc. v. Boyle ,
This bright-line distinction between producer and retailer tiers is incompatible with Sixth Circuit precedent. In Byrd , the Sixth Circuit found that Tennessee residency requirements for the owners of retail businesses applying for alcoholic beverage licenses did in fact violate the Commerce Clause, and it embraced the Fifth Circuit's interpretation of Granholm as "reaffirming the applicability of the Commerce Clause to state alcohol regulations, but to a lesser extent when the regulations concern the retailer or wholesaler tier as distinguished from the producer tier, of the three-tier distribution system." Byrd v. Tenn Wine and Spirits Retailers Ass'c ,
The Sixth Circuit held that whether the Twenty-first Amendment saves a dormant commerce clause violation will depend on "whether the interests implicated by a state regulation are so closely related to the powers reserved by the Twenty-first Amendment that the regulation may prevail, notwithstanding that its requirements directly conflict with express federal policies." Id. at 621-22. Put another way, "[d]istinctions between in-state and out-of-state retailers and wholesalers are permissible only if they are an inherent aspect of the three-tier system." Id. This is the test the Court applies to Michigan's retail wine shipment laws.
Michigan fails this test because it cannot demonstrate that permitting in-state retailers to ship directly to consumers while denying out-of-state retailers the right to do the same is inherent to its three-tier system. Michigan retains its Twenty-first Amendment powers to maintain a closed three tier system, just as it remained free after Granholm to prohibit wineries from shipping directly to consumers. But when it starts carving exceptions out of that system, it must do so without resorting to economic protectionism. The State's Twenty-first Amendment powers do not extend so far as to spare protectionist laws from the Commerce Clause. See Granholm ,
D.
Defendants therefore must defend their regulatory regime on the second prong of the dormant Commerce Clause analysis. A facially discriminatory law will only be upheld if it "advances a legitimate local purpose that cannot be adequately served by reasonable alternatives." Dep't. of Revenue of Ky. ,
*309Nevertheless, Defendants argue that four legitimate local purposes will save wine retailer-delivery discrimination from a Commerce Clause challenge. The Court considers each in turn.
1. Administrative Overburdening
The State argues that Michigan cannot feasibly regulate a nationwide market of wine retailers. The MLCC opines that 338,000 retailers nationwide could be eligible for licenses and references the heavy burden that licensing and regulating out-of-state wine retailers will entail. (Defs.' Ex. B, at ¶ 13). Plaintiffs argue that only a tiny fraction of these retailers will in fact apply for a license, as was the case in New Hampshire, and that the costs of running a shipping business will prevent the market from becoming saturated with out-of-state retailers. (Pls.' Ex. 14 & 15). It is impossible to know just how many applicants an expanded SDM license eligibility would create, but the State has not demonstrated that no reasonable alternatives exist to prevent administrative overflow. The MLCC could for instance tighten regulations with other non-discriminatory requirements or increase its application fees. The State cannot justify restricting market access to local businesses merely by pleading regulatory frugality and pointing out that Michigan has fewer potential licensees than the whole country.
2. Youth Access
The State argues that licensing out-of-state retailers to deliver wine would substantially increase the risk of minors obtaining alcohol. Defendants provide evidence that out-of-state direct shippers have sold more wine to minors during investigatory control sales. (Defs.' Ex. D at ¶ 18; Ex. C at ¶ 14). The Granholm Court already considered and rejected the justification of preventing youth access for winery direct shipments, finding that the states needed not only to show that a problem existed but also that alternative mechanisms could not solve that problem. Granholm ,
Preventing underage wine sales fails as a justification because the point-of-enforcement is on the delivery end. Michigan law provides that wine must be shipped in a specially marked package, and that only someone at least 21 years of age can accept delivery. M.L.C. 436.1203(15). Third party shippers must be approved by the MLCC and must keep records of their shipments for inspection. M.L.C. 436.1203(20)-(21). Michigan does not advance any theory on how its wine retailing websites better screen out minors than their out-of-state rivals, and in fact both websites would be equally accessible to Michigan officials seeking to investigate underage sales, as would both company's deliveries (presumably accomplished by the same common carrier). Further, as Plaintiffs argue, there are many forms of leverage the state can hold over out-of-state retailers short of the threat of property abatement. Bonds can be required from retailers where the MLCC sees fit, and, along with the SDM license itself, subject to forfeiture where necessary. The Granholm Court found that Michigan failed in 2005 to make the "clearest showing" that was necessary to justify discrimination. Granholm ,
*3103. Tax Collection
The State argues that collecting Michigan taxes from out-of-state retailers would be unworkable. Defendants base this conclusion off the MLCC's experience taxing out-of-state wineries. Direct shipper licensees pay the excise tax directly to the MLCC, but the Commission believes itself to be unable to collect the full taxes owed on such transactions. (Defs.' Ex. E). Defendants advance evidence that out-of-state wineries have disproportionately failed to timely file required tax documentation and have routinely underpaid taxes.
Indeed, the Court in Granholm found that there were reasonable alternative methods available to collect taxes without burdening interstate commerce. Michigan can simply require retailers to post a bond for taxes, as it already does in certain circumstances, and condition continued licensing on proper payment of taxes. Granholm ,
4. Product Safety
Michigan argues that permitting out-of-state retailer delivery would defeat the MLCC's product safety function. The only U.S.-specific research the defendant cited for this argument was an article that concluded that fake alcohol is not a large problem in the U.S. precisely because of the efficacy of state and federal regulation. See Robert M. Tobiassen, The Fake Alcohol Situation in the United States: The Impact of Culture, Market Economics, and the Current Regulatory System , CENTER FOR ALCOHOL POLICY (2014) at https://www.centerforalcoholpolicy.org/wp-content/uploads/2015/04/The_Fake_Alcohol_Situation_in_the_United-States_compressed.pdf (last visited Sep. 24, 2018). The one case of unsafe retailed wine reported by the article was that of certain wines containing diethylene glycol, that were recommended for recall by the Federal Bureau of Alcohol, Tobacco, Firearms and Explosives. See Banfi Products Corp. v. United States ,
E.
Defendants have not proven that the discriminatory elements of
REMEDY
Plaintiffs urge the Court to remedy the unconstitutionality of
When a district court finds that a statute is constitutionally defective, the court may either declare [the statute] a nullity and order that its benefits not extend to the class that the legislature intended to benefit, or it may extend the coverage of the statute to include those who are aggrieved by the exclusion.
Cherry Hill Vineyards, LLC v. Lilly ,
Extension is generally preferred over nullification. See Welsh v. United States ,
CONCLUSION
With an aim to creating minimal interference in the complex and interdependent statutory infrastructure of Michigan alcohol, the Court holds that
The Court finds that there are no genuine issues of material fact which would preclude judgment as a matter of law in this case that 2016 Public Act 520-read in conjunction with MLCC Section 436.1607 -violates the dormant Commerce Clause.
Consequently, Plaintiffs' Motion for Summary Judgment [31] IS HEREBY GRANTED .
IT IS FURTHER ORDERED that Defendants' and Intervenor's Motions for Summary Judgment [33, 34] are DENIED .
For the reasons stated herein, the Court DECLARES that Michigan's wine retail shipping laws are unconstitutional insofar as they forbid out-of-state retailers from shipping wine to Michigan customers.
Therefore,
IT IS HEREBY ORDERED that Defendants Michigan Governor Rick Snyder and Michigan Attorney General Bill Schuette, in their official capacities, and the State of Michigan ARE PERMANENTLY
*312RESTRAINED AND ENJOINED from enforcing provisions of M.C.L. §§ 436.1607 and 436.1203 to preclude out-of-state retailers of wine from shipping through interstate commerce to Michigan customers. This order shall not prevent the State of Michigan from collecting all appropriate taxes due on the sale of the wine or from requiring licenses and permits for direct interstate sales and deliveries.
SO ORDERED .
Reference
- Full Case Name
- LEBAMOFF ENTERPRISES v. SNYDER, Michigan Wine & Beer Wholesalers Association Intervening
- Cited By
- 1 case
- Status
- Published