Examining Lebamoff Enterprises v. Whitmer

On April 21, 2020, the US Court of Appeals for the Sixth Circuit handed down its opinion in Lebamoff Enterprises v. Whitmer, No. 18-2199 (6th Cir. 2020). Lebamoff has received substantial attention within the alcohol beverage industry as the first US court of appeals decision to examine direct-to-consumer (DTC) shipping restrictions since the Supreme Court of the United States issued its opinion in Tennessee Wine & Spirits Retailers Association v. Thomas (TWSRA), 588 U.S. ___, 139 S. Ct. 2449 (2019). The result—upholding Michigan laws permitting DTC shipping by in-state retailers but prohibiting such activity by out-of-state retailers—was widely hailed as a substantial victory for defenders of the state alcohol law status quo.

As explained below, the Sixth Circuit’s opinion in Lebamoff appears to substantially depart from recent Supreme Court teachings on the interplay of the “dormant” Commerce Clause and the 21st Amendment in several ways. Most surprisingly, Lebamoff does not even inquire about the evidence, of lack thereof, showing that the challenged law advances legitimate public health or safety interests. The Lebamoff opinion asserts that case law identifies certain state alcohol laws, including those establishing and maintaining a three-tier system, as per se legitimate and therefore protected from Commerce Clause challenge. In doing so, Lebamoff appears to revive in a new incarnation the position that state alcohol laws regulating wholesalers and retailers are immune from Commerce Clause scrutiny—a position emphatically rejected in TWSRA.

Background

Lebamoff Enterprises is an Indiana-based wine retailer and has served as a willing plaintiff in several lawsuits challenging state laws that prohibit interstate DTC shipment of wine by retailers located outside of the state. Representing Lebamoff in these lawsuits is the Indianapolis law firm of Epstein, Cohen, Seif & Porter. Two lawyers at that firm, Robert Epstein and Alex Tanford, have been at the forefront of litigating wine shipping cases for two decades, and they brought many of the lawsuits on winery shipping rights that led to the Supreme Court’s 2005 decision in Granholm v. Heald, 544 U.S. 460 (2005). In the years since Granholm, the Epstein firm has filed many lawsuits seeking to extend to retailers the same Commerce Clause non-discrimination principles applied in that case to winery shipping rights.

Lebamoff traces its genesis to 2016, when Michigan amended its Liquor Control Code to permit in-state retailers to engage in DTC shipping using common carriers (e.g., FedEx). The new law did not, however, permit DTC shipment by out-of-state retailers. Lebamoff and several other plaintiffs brought suit, arguing that by discriminating against out-of-state interests, the new law violated the “dormant” Commerce Clause, as well at the Constitution’s Privileges & Immunities Clause. (Although many Commerce Clause challenges also include claims under the Privileges & Immunities Clause, the latter claims invariably stand or fall with the Commerce Clause claims and face other obstacles, e.g., corporations have no standing under the Privileges & Immunities Clause. This article accordingly does not address the Privileges & Immunities Clause claim further.)

The US District Court for the Eastern District of Michigan ruled in favor of the plaintiffs, holding that Michigan’s law violated the Commerce Clause and was not saved by the 21st Amendment. Michigan, along with the Michigan Beer & Wine Wholesalers Association, which had intervened in support of the state, appealed that decision to the Sixth Circuit.

The Sixth Circuit Opinion

The two-judge Lebamoff opinion opens with a historical review of the US Prohibition experience leading to the adoption of the 21st Amendment, and states’ subsequent development of three-tier systems of alcohol distribution. It makes a point of explaining that the controls authorized by the 21st Amendment do not seek to create an efficient market, and instead aim to create a framework to allow states to heavily regulate the alcohol market for the good of the public.

The opinion next turns to what it characterizes as settled propositions from cases seeking to reconcile the tensions between the Commerce Clause and the 21st Amendment. Starting with the proposition that the test for state alcohol laws challenged on Commerce Clause grounds is “different” from the test applied to other (non-alcohol) state laws, it characterizes the test articulated under TWSRA as follows:

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.” 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.

The opinion goes on to identify three activities “that case law authorizes[.]” First, the opinion lists the three-tier system as permissible and, quoting a phrase first used in Justice Scalia’s concurrence in the 1990 North Dakota v. United States decision, “unquestionably legitimate.” Next, Lebamoff lists regulation of wholesalers as a way to control alcohol sales as authorized by case law. Finally, the opinion states that federal courts have permitted states “to require retailers to be physically based in the State.”

Having laid out what the court views as settled law, the opinion turns to the key question: can a state that has established a three-tier system for alcohol sales limit delivery options for retailers to only in-state retailers? After assuming (with some skepticism) that in- and out-of-state retailers can be characterized as similarly situated for Commerce Clause purposes, the opinion views the challenge as having entirely overlooked the 21st Amendment. In particular, Lebamoff cites approvingly to a series of pre-TWSRA court of appeals decisions holding that states can prohibit DTC sale or delivery by out-of-state retailers while permitting in-state retailers to take these actions: Bridenbaugh v. Freeman-Wilson, 227 F.3d 848 (7th Cir. 2000); Arnold’s Wines, Inc. v. Boyle, 571 F.3d 185 (2d Cir. 2009); and Wine Country Gift Baskets.com v. Steen, 612 F.3d 809 (5th Cir. 2010).

From these cases, the opinion asserts that “there is nothing unusual about the three-tier system, about prohibiting direct deliveries from out of state to avoid it, or about allowing in-state retailers to deliver alcohol within the State.” Permitting DTC shipments by out-of-state retailers would upend this status quo, creating a “sizeable hole” in the system. The system permits the state to regulate sales, with participants accepting the “bitter” of that regulation along with the “sweet” of limited competition. Within such a closed system, the opinion reasons that allowing DTC shipment by in-state retailers merely authorizes a new means by which heavily regulated retail businesses can operate within the existing and legitimate structure.

The opinion next addresses Lebamoff’s counter-arguments. Most notably, it acknowledges that in Granholm the Supreme Court rejected many of the state’s proffered justifications—preventing sales to minors, facilitating tax collection and ensuring safe products. “But even if Michigan could protect minors and ensure retailer accountability in other ways there is no other way it could preserve the regulatory control provided by the three-tier system.” According to the opinion, Granholm does not affect the analysis because it addressed an exception to the three-tier system, not the system itself. Again relying on pre-TWSRA court of appeals decisions, the opinion cites “a growing lower court consensus” that discrimination between in- and out-of-state retailers passes Commerce Clause muster.

Lebamoff closes by briefly addressing (and rejecting) the plaintiffs’ Privileges & Immunities Clause claims and examining the remedy ordered by the district court. Notably, even if the Sixth Circuit had upheld the district court on the merits, the opinion would have crafted a different remedy by prohibiting in-state retailers from engaging in DTC shipments.

Examining Lebamoff in Light of TWSRA

During last year’s oral argument in TWSRA, multiple Supreme Court justices signaled that they anticipated DTC privileges as a looming issue. Moreover, multiple justices made it clear that they did not want their TWSRA decision to dictate the result of pending cases addressing the retailer DTC issue. Post-TWSRA, then, a decision either upholding or striking state DTC restrictions should not have surprised anyone. But much of the reasoning in Lebamoff did surprise, for multiple reasons:

• Where’s the Evidence?

The Lebamoff opinion never cites to or otherwise examines evidence that might support the state’s assertion that its discriminatory shipping ban constitutes a legitimate public health or safety measure. Indeed, in quoting TWSRA, the Lebamoff opinion studiously avoids any discussion of an evidentiary burden. This seems to ignore one of the central instructions of the Supreme Court.

In addressing the public health and safety justification, TWSRA explains:

“mere speculation” or “unsupported assertions” are insufficient to sustain a law that would otherwise violate the Commerce Clause.

Applying that principle to the question presented in TWSRA, the Supreme Court concluded:

the record is devoid of any “concrete evidence” showing that the 2-year residency requirement actually promotes public health or safety; nor is there evidence that nondiscriminatory alternatives would be insufficient to further those interests.

The Supreme Court unmistakably made evidence, or lack thereof, central to its evaluation of a state alcohol law challenged on Commerce Clause grounds.

The Sixth Circuit’s failure to examine or even mention evidence supporting the state’s position is quite surprising in light of the Supreme Court’s TWSRA analysis. As an interesting side note, Judge McKeague’s concurrence in Lebamoff does pay lip service to the state’s need for evidence, but would find that the state met its evidentiary burden because it relied on measures that “inherently” protect public health or are “baked-in” to existing regulatory structures. Such assertions simply do not look like evidence.

• A Return to the Pre-TWSRA “Lower Court Consensus”?

Prior to TWSRA, several court of appeals decisions held that the non-discrimination principle applied to invalidate discriminatory wine shipping laws in Granholm was limited to laws regulating producers and products. This limitation allowed those courts of appeal to reconcile the holding and result of Granholm with dicta in that decision declaring the three-tier system “unquestionably legitimate.” Under this reasoning, state laws regulating wholesalers and retailers were wholly immune from Commerce Clause scrutiny.

TWSRA emphatically rejected this line of reasoning. Indeed, it found “no sound basis” for distinguishing between the examination of state laws regulating producers and products, and the examination of laws that regulate in-state alcohol distribution. It is quite a surprise, then, that the Lebamoff opinion extensively and approvingly cites pre-TWSRA case law such as Wine Country, Arnold’s Wines and Jelovsek v. Bredesen (6th Cir. 2008). The Lebamoff opinion reads as though TWSRA had embraced, not rejected, the central legal reasoning behind those decisions.

The Lebamoff opinion does not, of course, openly rely on the (rejected) theory that laws regulating distribution within the state are immune from Commerce Clause scrutiny. Instead, the opinion arrives at largely the same result by articulating this immunity in a different way. The Sixth Circuit lays the groundwork for doing so by asserting in its recitation of the law that prior cases establish the unquestioned legitimacy of state laws creating a three-tier system, state laws regulating wholesalers, and state laws requiring retailers to be physically present in the state. But TWSRA did not accept this premise, explaining that although Granholm had endorsed the basic three-tier model, “it did not suggest that §2 sanctions every discriminatory feature that a State may incorporate into its three-tiered scheme.”

Lebamoff, in contrast, puts laws establishing a three-tier system and laws requiring an in-state presence off limits, ostensibly as a matter of settled (pre-TWSRA) case law. As virtually any state law regulating in-state distribution will have a role in establishing features of a state’s three-tier structure, the Lebamoff opinion’s reasoning confers virtual immunity on such laws, but articulates this position in a new way.

• Does the Three-Tier System Advance Health and Safety Per Se?

In addition to reliance on pre-TWSRA case law, central to the Lebamoff opinion’s detour around the need for evidence is its elevation of the three-tier system as a policy justification in itself.

In addressing plaintiffs’ position, Lebamoff offers this:

Lebamoff is skeptical of other potential justifications for Michigan’s law: preventing sales to minors, facilitating tax collection, and ensuring safe products. Granholm rejected many of these justifications in the context of direct-delivery restrictions, it is true. There is room for skepticism, we agree, over whether Michigan’s delivery restrictions prevent sales to minors in any material way. But even if Michigan could protect minors and ensure retailer accountability in other ways, there is no other way it could preserve the regulatory control provided by the three-tier system (emphasis added, citations omitted).

Lebamoff accordingly elevates the preservation of a three-tier system as a way to side-step the fact that even the justifications (never mind the evidentiary basis for them) offered by the state to preserve the law already had been found wanting by the Supreme Court. Preservation of the three-tier system accordingly becomes its own goal and justification, aside from any other justifications, much less evidence.

The basis for this critical aspect of Lebamoff is not apparent from the TWSRA opinion. Under this reasoning, Granholm‘s demand that states treat in-state and out-of-state shipping privileges the same does not apply to the question of retailer shipments, as winery shipment constitutes an exception to the three-tier system. In other words, state laws discriminating between the DTC privileges for retailers are shielded from Commerce Clause scrutiny as a matter of law and not, perhaps, by an examination of relevant evidence. Once again, this aspect of Lebamoff appears to ignore the central teachings of TWSRA in favor of the position taken by multiple courts of appeal before TWSRA that state laws regulating in-state distribution (i.e., retailers and wholesalers) are immune from Commerce Clause scrutiny.

Summary

Does Lebamoff correctly reconcile the Commerce Clause and the 21st Amendment? Only time and future decisions will provide further clarity.

Perhaps the Sixth Circuit has identified an alternative analysis implicit in TWSRA. The Supreme Court certainly has stated that the three-tier system is “unquestionably legitimate.” Taking that statement on its face, the Supreme Court may have wanted to limit the evidentiary analysis in TWSRA to those legal challenges that do not threaten the ability of a state to “maintain a three-tier system.” But if the Supreme Court had intended to substantially limit the application of its evidentiary examination of challenged state laws to ascertain whether they serve a legitimate public health or safety purposes, why didn’t it say this in the TWSRA opinion?

Moreover, the newly minted Lebamoff analysis giving state laws de facto immunity if they “maintain a three-tier system” raises important questions. If a state can enact with impunity laws that channel all alcohol through a strict three-tier distribution structure, why can’t those three-tier laws require that wholesalers purchase only from in-state manufacturers? Such a law would strike at the heart of what the Commerce Clause was designed to prevent, but if the law maintains a given state’s three-tier model (as it most assuredly would), would the Sixth Circuit view it as protected from Commerce Clause challenge? And if the Sixth Circuit views a law mandating a physical presence in the state as fundamental to maintaining a three-tier system and accordingly safe from challenge, how does that differ as a matter of law from laws mandating residency in the state (the question addressed in TWSRA)? In today’s e-commerce-driven world, a reasonable argument can be made that a licensee’s citizenship and/or residency is more important to preserving state power than the physical presence of a storefront.

The approach taken in TWSRA handily addresses questions such as these by conducting a case-by-case evaluation of any given state law, then asking whether the law primarily advances legitimate public health and safety goals, or whether it does not and therefore represents prohibited protectionism. The Lebamoff approach, in contrast, requires federal courts to draw bright lines to distinguish imprecise concepts, such as whether a particular law “maintains a three-tier system.”

Because Lebamoff follows less than a year after the decision in TWSRA, the likelihood of Supreme Court review of the Sixth Circuit’s decision seems low. Given the Supreme Court’s limited resources, it will not likely revisit this precise question very soon, as history shows that the Court often lets a decade or more pass between cases addressing the interplay of the Commerce Clause and the 21st Amendment. But even if, as seems likely, the Lebamoff opinion stands for some period of time, the faithfulness of its analysis to the Supreme Court’s 21st Amendment jurisprudence is open to significant questions.