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 for the Sixth Circuit
Decided and Filed: April 21, 2020
RECOMMENDED FOR PUBLICATION Pursuant to Sixth Circuit I.O.P. 32.1(b). File Name: 20a0119p.06. Appeal from the United States District Court for the Eastern District of Michigan at Detroit. No. 2:17-cv-10191—Arthur J. Tarnow, District Judge. Argued: March 12, 2020.
Before: SUTTON, McKEAGUE, and DONALD, Circuit Judges.
COUNSEL
ARGUED: Mark G. Sands, MICHIGAN DEPARTMENT OF ATTORNEY GENERAL, Lansing, Michigan, for State of Michigan Appellants. Deborah A. Skakel, BLANK ROME LLP, New
SUTTON, J., delivered the opinion of the court in which McKEAGUE and DONALD, JJ., joined. McKEAGUE, J. (pp. 17–20), delivered a separate concurring opinion in which DONALD, J., joined.
OPINION
SUTTON, Circuit Judge. The parties agree that the
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 produсers 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 (1890).
Extreme problems sometimes prompt extreme solutions. With ratification of the
In a three-tier system, the State forbids alсohol 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
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 cоnsumers. 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.,
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
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
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.
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
Both sides moved for summary judgment. The сourt 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.”
The other provision is the
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
The courts also have permitted States to regulate wholesalers (the second tier) as a way to control the volume of alcohol sold in a State and the terms on which it is sold. See North Dakota, 495 U.S. at 432–33 (plurality opinion); see also id. at 447–48 (Scalia, J., concurring in the judgment); Bridenbaugh v. Freeman-Wilson, 227 F.3d 848, 853–54 (7th Cir. 2000); S. Wine & Spirits of Am., Inc. v. Div. of Alcohol & Tobacco Control, 731 F.3d 799, 810–11 (8th Cir. 2013). The Michigan system shows how this works. The State is the wholesaler for liquor, and it sells at an inflated price through state-authorized distribution agents. See
The federal courts also have permitted States, like Michigan, to requirе retailers to be physically based in the State. Byrd, 883 F.3d at 622–623 & n.8; Cooper v. Tex. Alcoholic Beverage Comm‘n, 820 F.3d 730, 743 (5th Cir. 2016). The Michigan licensing process for retailers ensures no violations of “tied-house” rules and no suspect sources of capital. To ensure compliance with its many regulations, the Commission conducts random inspections, over 18,000 in 2016 alone, and sting operations. Retailers also must comply with rules governing their physical layout, storage of alcohol, recordkeeping, advertisements, and employee training.
B.
All of this leaves a narrow question. If Michigan may have a three-tier system that requires all alcohol sales to run through its in-state wholesalers, and if it may require retailers to locate within the State, may it limit the delivery options created by the new law to in-state retailers? The answer is yes.
“[A]ny nоtion of discrimination assumes a comparison of substantially similar entities.” Gen. Motors Corp. v. Tracy, 519 U.S. 278, 298 (1997). That is not clear when it comes to a comparison between Michigan retailers and Indiana retailers like Lebamoff. True, they both sell the same product to consumers. True also, retailers in Northern Indiana and Southern Michigan presumably compete with each other for those consumers. But they operate in distinct regulatory environments, the most notable distinction being that Michigan-based retailers may purchase only from Michigan wholesalers and must operate within its three-tier system and comply with its other regulations. That may affect
Even if Indiana and Michigan retailers count as similarly situated under the dormant Commerce Clause, Lebamoff‘s claim overlooks the restless specter of the
Michigan‘s law promotes plenty of legitimate state interests, and any limits on a free market of alcohol distribution flow from the kinds of traditional regulations that characterize this market, not state protectionism. The States, the Court has explained, have legitimate interests in “promoting temperance and contrоlling the distribution of [alcohol].” North Dakota, 495 U.S. at 433, 438–39 (plurality opinion); see id. at 447–48 (Scalia, J., concurring in the judgment); Granholm, 544 U.S. at 484; Bacchus Imports, Ltd. v. Dias, 468 U.S. 263, 276 (1984); cf. 44 Liquormart, Inc. v. Rhode Island, 517 U.S. 484, 504–07 (1996). To promote these interests, States have “virtually complete control over whether to permit importation or sale of liquor and how to structure the[ir] liquor distribution system[s].” Granholm, 544 U.S. at 488; see North Dakota, 495 U.S. at 424 (plurality opinion); Midcal Aluminum, 445 U.S. at 110.
Consistent with these decisions, several lower courts have permitted the States to prohibit out-of-state direct deliveries as a valid exercise of their
The Seventh Circuit got the ball rolling. In an opinion by Judge Easterbrook, the court upheld an Indiana statute that prohibited direct alcohol deliveries from out of state but allowed in-state retailers and wholesalers to “deliver directly to consumers’ homes.” Bridenbaugh, 227 F.3d at 853–854. The
The Second Circuit upheld a similar law. It permitted in-state retailers to deliver to customers’ homes (through their own vehicles or trucking companies) but barred out-of-state retailers from doing the same. Arnold‘s Wines, Inc. v. Boyle, 571 F.3d 185, 187, 191 (2d Cir. 2009). Banning direct deliveries from out-of-state, the court reasoned, was necessary to ensure “all liquor sold within” the state passed through in-state wholesalers. Id. at 186. And state control of the wholesalers, it added, promoted “core”
The Fifth Circuit upheld a Texas statute that allowed local delivery by in-state retailers but prohibited deliveries from outside the State. Steen, 612 F.3d at 812. It upheld thе law for much the same reasons as the courts that went before it: Differential treatment of out-of-state deliveries was necessary to preserve the three-tier system and the regulatory objectives it served. Id. at 819–20. Nor did in-state delivery privileges undermine this rationale. Like “carry[ing] the beverages to a customer‘s vehicle parked in [a retailer‘s] lot, or across the street,” in-state deliveries were a “a constitutionally benign incident” of a three-tier a system. Id. at 819, 820.
As these opinions suggest, 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. Opening up the State to direct deliveries from out-of-state retailers necessarily mеans opening it up to alcohol that passes through out-of-state wholesalers or for that matter no wholesaler at all. See Arnold‘s Wines, 571 F.3d at 185 n.3. That effectively eliminates the role of Michigan‘s wholesalers. If successful, Lebamoff‘s challenge would create a sizeable hole in the three-tier system. Michigan imposes heavy taxes on all alcohol products at the wholesale level.
There‘s ample reason to think Indiana retailers like Lebamoff would do just that. While Michigan and Indianа both have three-tier systems, they regulate them differently. Unlike Michigan, Indiana permits wholesalers to sell to retailers below cost, with volume discounts, on credit, and with no minimum prices. See
The alert reader may wonder if Michigan can respond to this problem by controlling prices set by out-of-state wholesalers and producers. No, it may not. The extraterritoriality doctrine, also rooted in the dormant Commerce Clause, bars state laws that have the “practical effect” of controlling commerce outside their borders. Healy v. Beer Inst., 491 U.S. 324, 336 (1989); see Am. Beverage Ass‘n v. Snyder, 735 F.3d 362, 377 (6th Cir. 2013) (Sutton, J., concurring). Although Michigan may
That Michigan permits direct deliveries by in-state retailers does not alter this conclusion. These retailers all live with the bitter and sweet of Michigan‘s three-tier system—the bitter of being able to buy only from Michigan wholesalers (and the price and volume regulations that go with it) and the sweet of being subject only to intrastate competition. Permitting these retailers to deliver directly to consumers is nothing new. Michigan hаs long allowed retailers to use third-party delivery to serve customers who live in areas “surrounded by water and inaccessible by motor vehicle.”
The text and history of the
C.
Lebamoff challenges this conclusion in several ways, each unconvincing. It argues that ordinary dormant Commerce Clause analysis аpplies (false) and that the
Lebamoff tries to minimize the State‘s interest in preserving a three-tier system, criticizing the costs it imposes. But Michigan could not mаintain a three-tier system, and the public-health interests the system promotes, without barring direct deliveries from outside its borders. No amount of additional money through spending appropriations or “rais[ed] license fees,” Appellee Br. 28, could change that reality.
Granholm‘s holding does not change this calculus. It concerned a discriminatory exception to a three-tier system. Granholm, 544 U.S. at 466. In-state wineries could avoid in-state wholesalers and retailers and thus deliver directly to consumers, while out-of-state wineries could not. That was the “explicit discrimination” in Granholm, not delivery privileges by themselves. Id. at 467. Lower courts have characterized Granholm in exactly this way and rejected challenges like Lebamoff‘s. See, e.g., Arnold‘s Wines, 571 F.3d at 190–91 (upholding state law that permitted in-state, but not out-of-state, retailers to deliver alcohol to consumers’ homes); Steen, 612 F.3d at 818–19 (same). There is no appellate decision to the contrary.
Lebamoff suggests that a state senator‘s statement conveys a discriminatory motive. Here is the statement: “[Michigan retailers] currently cannot [deliver wine] legally. And they are under tremendous disadvantage, competitive disadvantage, with оut-of-state entities that are doing it illegally right now. So this is a bill to help out our constituents, our local businesses to be more competitive in the marketplace.” Dec. 8, 2016, MacGregor Statement on S.B. 1088 at 40:50–41:16, https://www.house.mi.gov/SharedVideo/PlayVideoArchive.html?video=COMM-120816.mp4. As the senator said elsewhere, however, the amendment‘s purpose was not to give Michigan businesses an advantage but to “level[] the playing field.” Id. at 40:15. Even if one legislator‘s voice offered a meaningful insight into a collective body‘s objectives (doubtful), the statement in context shows only the legitimate goal of evening the playing field.
Nor does Michigan‘s past treatment of direct deliveries upset this conclusion. Before the 2017 amendment, Michigan permitted out-of-state retailers to dеliver alcohol using their own vehicles and employees.
What of the consumer plaintiffs, the Michigan wine purchasers who сannot buy the types of wine they want without inconvenience? The record for one suggests these concerns may be exaggerated. Wine
Even so, it‘s likely the case that some wine producers do not sell to Michigan wholesalers due to these regulatory costs. Some rare wines, for example, apparently are available only through specialty retailers located primarily in California, New York, New Jersey, and Chicago. Concurring Op. at 1. But some reduction in consumer choice, it seems to us, flows ineluctably from a three-tier system. The purpose of the system, for better or worse, is to make it harder to sell alcohol by requiring it to pass through regulated in-state wholesalers. Those middlemen unsurprisingly impose added costs, sometimes choice-limiting costs. Still, it‘s worth noting that Michigan has loosened some regulations to increase choice. That was the point of allowing limited direct deliveries by out-of-state wine producers. Perhaps more amendments are in order. Broadening product options seems far afield from the tied-saloon system that the three-tier system was designed to replace. The internet has widened that gap. Today “[w]e live in a global economy and we shop in virtual marketplaces for everything from luxuries to necessities.” Id. at 2. But the
D.
Also unavailing is Lebamoff‘s claim that the lаw violates the Privileges and Immunities Clause of
Long ago, the Court rejected the idea that the right to sell alcohol was a privilege or immunity under the similarly-worded
On top of that, the Clause concerns discrimination based on state citizenship or residency, see McBurney, 569 U.S. at 228, and Michigan‘s law does not discriminate on that basis. Residents
Lebamoff offers no good reason to depart from these principles or to treat this claim in a different way from the dormant Commerce Clause claim. To its credit, Lebamoff admits that “[n]o prior case in this or аny other circuit” has found a state regulation of alcohol violated the Privileges and Immunities Clause. Appellee Br. 54. We see no good reason to be the first.
III.
Even if the district court had been right in deciding that the law violated the dormant Commerce Clause, it bears adding, the court chose the wrong remedy. Rather than altering Michigan‘s alcohol distribution system by extending delivery rights to out-of-state retailers, it should have returned things to the pre-2017 status quo.
At stake was whether to invalidate a new law or extend the prior law‘s reach. In answering that question, we ask what the legislature would have preferred had it known of the constitutional problem, see Murphy v. NCAA, 138 S. Ct. 1461, 1482 (2018), doing our best to “limit the solution to the problem,” Ayotte v. Planned Parenthood of N. New Eng., 546 U.S. 320, 328–29 (2006). The imperative is not to “rewrite a statute and give it an effect altogether different from that sought by the measure viewed as а whole.” Murphy, 138 S. Ct. at 1482 (quotation omitted).
Look no further than the text of this law for guidance. “If any provision of this act is found to be unconstitutional,” it says, “the offending provision shall be severed and shall not affect the remaining portions of the act.”
Another clue points in the same direction. A statutory purpose of the provision at issue,
The district court‘s solution was to strike the amendment and parts of the original statute. The court held the 2017 amendment unconstitutional “insofar as” it precluded direct delivery “in conjunction with [Mich. Comp. Laws] Section 436.1607.” R. 43 at 20. Section 1607 provides that only in-state retailers can get delivery licenses, and it was not part of the 2017 amendment. It was enacted over a decade earlier. See
Some cases, it is true, suggest courts may remedy discrimination by extending benefits rather than retracting them. See, e.g., Heckler v. Matthews, 465 U.S. 728, 733 (1984); Cherry Hill Vineyards, LLC v. Lilly, 553 F.3d 423, 435 (6th Cir. 2008). But that is a rule of thumb for approximating the “touchstone” of the severability question: legislative intent as captured by the words of the statute. Ayotte, 546 U.S. at 330. Today‘s severability clause clearly conveys the Michigan legislature‘s intent, and it distinguishes оur case from the one on which Lebamoff most heavily leans: Cherry Hill, 553 F.3d at 435. Another of Lebamoff‘s supposedly favorable cases notes the imperative of following “the intent of the legislature” by “consider[ing] the degree of potential disruption of the statutory scheme that would occur by extension as opposed to abrogation.” Heckler, 465 U.S. at 739 n.5 (quotation omitted). The district court‘s two-paragraph analysis on this score reveals no consideration or appreciation of that disruption.
We reverse and remand for proceedings consistent with this opinion.
CONCURRENCE
McKEAGUE, Circuit Judge, concurring.
I ultimately agree that Michigan has presented enough evidence, which the plaintiffs have not sufficiently refuted, to show its in-state retailer requirement serves the public health. Tennessee Wine and Spirits Retailers Ass‘n v. Thomas, 139 S. Ct. 2449, 2474 (2019).
However, what I believe is the crux of this case is the online shipping component. That Michigan prohibits out-of-state retailers from selling wine online and shipping directly to consumers—but permits wineries and in-state retailers to do so—adds two distinct wrinkles into an otherwise protected three-tier system. First, it asks us to conduct a reexamination of regulations that impede internet commerce generally, given the “‘far-reaching systemic and structural changes in the economy’ and ‘many other societal dimensions’ caused by the Cyber Age.” South Dakota v. Wayfair, Inc., 138 S. Ct. 2080, 2097 (2018) (quoting Direct Mktg. Ass‘n v. Brohl, 135 S. Ct. 1124, 1135 (2015) (Kennedy, J., concurring)). Second, it weakens the public health justifications—thus strengthening the dormant Commerce Clause challenge in this case—but not enough to change the result.
Let‘s look at it from the perspective of a consumer. The Michigan consumers in this appeal all have varying reasons for buying wine online. Some purchase wine online due to time restraints. Others purchase wine online because the wine they desire is available only online. This is especially true when it comes to imported wine. For example, from 2012 to 2016, 511,437 different wines were approved for sale in the United States. Of those, 65% were of imported origin. And while consumers in most states, including Michigan, may purchase wine directly from wineries across the country, imported wine may only be purchased from retailers within their state and may not be shipped directly from the producer located out of the country or from retailers located outside the state of Michigan. Unsurprisingly, a number of specialty wines are housed only at specialty retailers located primarily in California, New York, New Jersey, and Chicago. So, as evidenced, there‘s a market for buying wine online, especially from retailers.
But Michigan allows only in-state retailers access to this online market. Only in-state retailers that hold a specially designated merchant license may ship wine directly to consumers.
A consumer looking to buy wine for a special occasion can go online, research different varieties of wine, read reviews from aficionados, and select a bottle or two
Obviously, this case involves wine and therefore the
And with thе existing balance now, Michigan‘s position prevails. Michigan‘s amendment permitting only in-state retailers to ship directly to consumers must have a public health justification on its own. Because Michigan chose to allow in-state retailers to ship wine directly to consumers, it “must do so on evenhanded terms.” Granholm, 544 U.S. at 493. If not evenhanded, Michigan must present sufficient evidence to show a public health justification. Id.; Tennessee Wine, 139 S. Ct. at 2474.
While the online shipping component of Michigan‘s regulations weakens its public health rationales, Michigan can still show that the in-state retailer requirement protects public health. But to their credit, the plaintiffs offer persuasive counterarguments.
Start with the flaws in Michigan‘s public health rationales. Take for example Michigan‘s argument that the in-state rеquirement allows it to monitor the sale of alcohol to underage individuals. Michigan argues that in the five years before the conclusion of discovery in this case, there had been 3,125 violations for sales to minors uncovered by sting operations involving a minor decoy. Opening up online sales to out-of-state retailers, the argument goes, would make a bad situation worse.
But the fact that in-state retailers can sell online cuts against this rationale. If Michigan thinks there is such a risk of underage sales in the state, why expand that risk by allowing online sales? True, the common carrier delivering alcohol to the consumer‘s door must be licensed by Michigan and check the consumer‘s identification and age at the time of delivery.
However, in the end, Michigan prevails in its justifications. The tricky part is that Michigan can largely rely on what has already been found to inherently protect public health. For example, requiring retailers to be in-state to sell online allows Michigan to “monitor the stores’ operations through on-site inspections.” Tennessee Wine, 139 S. Ct. at 2475.
For retailers that don‘t comply with the law, this allows Michigan to revoke licenses (and even recall all products), and this has already been found to “provide[] strong incentives not to sell alcohol in a way that threatens public health or safety.” Id. (citing Granholm, 544 U.S. at 490) (internal quotation marks omitted). In 2016, Michigan conducted 18,039 on-site physical inspections and related contacts at retail establishments for licensing and enforcement purposes. And these inspections “routinely uncover evidence of violations of the Code and administrative rules.” Moreover, whether online sales are an extension to traditional three-tier systems or not (which, again, I question), there are the other baked-in public health justifications that flow from such systems, like promoting temperance. Bacchus Imports, Ltd. v. Dias, 468 U.S. 263, 276 (1984). The plaintiffs here have not produced sufficient countervailing evidence showing that these public health concerns are “mere speculation” or “unsupported assertions,” or that the “predominant effect” of the in-state retailer requirement is not the protection of public health. Tennessee Wine, 139 S. Ct. at 2474.
With these reservations, I concur.