Case Information

*1 @ffice of the !Zlttornep @eneral &date of Ilf;exae DAN MORALES August II,1995 ATTORNEY CEh’ERAL

Mr. Doyne Bailey OpinionNo. DM-361 Administrator

Texas Alcoholic Beverage Commission Re: Whether a requirement in the Alcoholic Beverage Code that an applicant P.O. Box 13127 for a liquor license or petmit have been a Austin, Texas 78711-3127

resident of Texas for at least one year Wore submitting the application violates the United States Constitution (RQ-747) Dear Mr. Bailey:

Various provisions of the Alcoholic Beverage Code (the “code”) require an applicant for an alcoholic beverage* permit or hcense to have resided in the State of Texas for a period of one year prior to submitting the application. You ask whether the one-year residency requirement violates the United States Constitution. You particularly ask that we consider your question in light of a decision of the United States Court of Appeals for the Pii Ciit concluding that a similar three-year residency requirement was wnsthutionally invalid.

The code requires any individual who de&es to manufacture, sell, transport, or warehouse Liquor to first obtain from the Alcoholic Beverage Commission (the “commission”) an appropriate permit. Alto. Bev. Code 0 11.01(a). Section 11.46(a)(ll) of the code authorizes the commission or the administrator of the commission to retirse to grant an original or renewal permit if the applicant has not been a citizen of Texas for a period of one year immediately preceding the date he or she tiled the application. Siiy, section 61.01 requires an individual who desires to manufacture or brew beer for commercial purposes to obtain a license or permit, as appropriate, from the county in which the individual desires to conduct business. See &o id. 5s 61.3 I- .32. In general, a county judge must deny an application for a license as a distributor or retailer if the county judge 6nds that the applicant has not been “a citizen of Texas for a period of one year immediately preceding the IIing of his application.” 8 61.42. Other provisions of the code contain similar residency requirements. See id. 0s 11.61@)(19), 109.53.

Prior to September 1, 1993, the Alcoholic Beverage Code required that an applicant for a permit or license have resided in Texas for three. years preceding the Sling of the application. See id. $5 11.46,61.42, amended by Act of May 29, 1993,73d Leg.,

*For proposes of the cede, “alcoholic beverage” means “alcdoi. or any beverage containing snore tbm ooehlf of one percent of alcohol by volume, which is capable of use for beverage purposes, either alone or when diluted.” Ako. Bev. Code 6 1.04(l). *2 (DM-36 1)

RS., ch. 934, 3s 21, 50, 1993 Tex. Sess. Law Serv. 3954, 3960-61, 3970-71. Under the previous version of the law, two individuals who were not Texas residents and whose applications for a mixed beverage permit the commission therefore denied filed a lawsuit claiming that the statutory residency requirement violated the United States Constitution. See Cooper v. McBeaih, 11 F.3d 547, 547 (5th Cir.), ceri. denied, 114 S. Ct. 2675 (1994). As partners, the two individuals sought to purchase a nightclub in San Antonio from a Texas corporation, K.S. Enterprises, Inc. (“KSE”). at 549. Toward this end, they established and wholly owned a Tennessee corporation, Bexar County Enterprises (“BCE’), which purchased forty-nine percent of KSE’s stock. BCE also acquired an option to purchase the remaining shares when the stock transfer could occur without jeopardixing KSE’s permit to sell alcoholic beverages at the nightclub. Id.

One facet of the three-year residency requirement forbade the issuance of a permit to any corporation “unless at least 5 1 percent of the stock of the corporation is owned at Id.; all times by citizens who have resided within the state for a period of three ye@.]” Alw. Bev. Code 8 109.53, ameAd by Act of May 29, 1993, 73d Leg., RS., ch. 934, 3 90, 1993 Tex. Sess. Law Serv. 3954, 3983-84. Thus, the Alcoholic Beverage Commission refbsed even to conduct background investigations on the owners of BCE because th9 were not Texas residents. Coorper, 11 F.3d at 549. Apparently, the owners filed suit challenging the statute’s three-year residency requhement in general, not just the “5 1 percent rule.” See id. (listing challenged code provisions). The United States District Court for the Western Diict of Texas held the three-year residency requirement tmconstitutional. Wikan v. McBeafh, No. A-go-CA-736, 1991 WL 540043, at * 11, afd sub nom. Cooper v. McBeath, 11 F.3d 547 (5th Cu.), cert. denied, 114 S. Ct. 2675 (1994).

On appeal to the United States Court of Appeals for the Fii Ciicuih the plaintit%-appellees argued that the durational residency requirements in the codes violated the Commerce Clause, U.S. Const. art. I, 8 8, cl. 3, or the Privileges and Immunities Clause, id. art. IV, 5 2. Cooper, 11 F.3d at 549. The Fii Ciicuit specifically considered the constitutionaiity of the durational residency requirement in the “5 1 percent rule.” Id.

The Commerce Clause. empowers Congress to regulate commerce among the several states. Id. at 552 (quoting U.S. Const. art. I, 5 8, cl. 3). The court in Cooper noted that, in addition to bestowing powers upon Congress, the Commerce Clause “abso contains a ‘dormant’ facet that serves as ‘a substantive restriction on permissible state reg- (quoting Dennis v. Higgins, 498 U.S. 439, 447 ulation of interstate commerce.“’ (1991)). The dormant aspect of the Commerce Clause “‘prohibits economic protec- tionism-that is, regulatory measures designed to benetit in-state economic interests by (quoting New Energv Co. v. Limbach, 486 U.S. burdening out-of-state competitors.“’

ZThe United States Court of Appeals for the Fib Circuit Wed several pvisio~ in the cude that amtaincd the-year residency requirements: sections 11.46@)(11). 11.61@)(19), 28.04, and 109.53. Cooper, 11 E3d at 549.

269,273-74 (1988)). The Cooper court also noted that the United States Supreme Court has struck down a state’s efforts to grant its own residents preferred rights of access over nonresidents to resources located within its borders. Id. at 552-53 (citing Hughes v. Oklahoma, 441 U.S. 322, 337-38 (1979)).

In Cooper the court explained that, when analyzing whether a particular state law codifies economic protectionism and thus violates the Commerce Clause, the United States Supreme Court uses a two-tiered approach. at 553.

Under this framework, state statutes that diiy discriminate against interstate commerce, or whose effects favor in-state economic interests at the expense of out-of-staters, are routinely struck down. . . “unless the discrimination is demonstrably justified by a valid factor unrelated to economic protectionism.” . .

When, however, a statute regulates in an evenhanded manner and had only direct3 effects on interstate commerce,~ we assess “whether the State’s interest is legitimate. and whether the burden on interstate commerce clearly exceeds the local beneSts.” Id. (citations omitted) (footnote added).

The court reasoned that the le@lature originaUy did not intend the tit&one percent requirement to be protectionist because the legislature enacted the statute immediately following the repeal of the Eighteenth Amendment to the United States Constitution in 1933 and, thus, no liquor industry existed in Texas that needed protection. However, the court found that the Texas law was not entitled to the lower standard of scrutiny articulated in the second tier of the Supreme Court’s approach because the effect was protectionist: the statutory requirements resulted in “overt, m-state favoritism [that] cannot be ignored.” According to the court, the fifty-one percent requirement created an “impenetrable barrier” to out-of-staters who wished to enter the Texas liquor industry on terms substantially equal to those Texans enjoyed. Id.

Thus, the court found that the fitly-one percent requirement was in the category of statutes that the United States Supreme Court routinely strikes ,down, “‘unless the d&imination [against out-of-state residents] is demonstrably justitied by a valid factor (quoting New Energy Co., 486 U.S. at 274). unmlated to economic protectionism.“’ As the court said, “even plainly discriminatory statutes may survive a Commerce Clause challenge ifthe State can demonstrate that the statutes advance ‘a legitimate local purpose

3For the proposition that a ceurt will apply a lesser standard to review a statute that regulates co- in an evenhanded manner, the Cooper court cited BnnmFonmm Distillers v. New York, 416 U.S. 573, 579 (1986). ln Brown the United States Supreme Court said, ‘[w]han . . . a statute has only indirect clfects on interstate commera and regulates evenhandedly, we have examined whether the State’s interest is legitimate and whether the burden on interstate cemmerce clearly exceeds the local be&its.” (Emphasis added.)

0. 1940 *4 that cannot be adequately served by reasonable nondiscriminatory alternatives.“’ Id. (quoting New Energy Co., 486 U.S. at 278). The state bears the burden of proof Id.

Before the Fifth Circuit, the State of Texas contended that it established the statutory system for the distribution of alcoholic beverages “‘to protect the health, safety, welfare, morals and temperance”’ of Texas cit~hzens. at 554 (quoting Alto. Bev. Code Q 1.03). The court found, however, that “[s]uch boilerplate enabling language hardly explains the State’s particular restrictions on out-of-state ownership of various liquor licenses.” Id. The State next contended that the residency requirements are necessary so that the commission may conduct “an intensely local scmening of each applicant’s reputation in the community plus a complete, thorough business and financial investigation.” Moreover, according to the State, the commission’s “abiity to investigate an out-of-state applicant’s reputation and qualifications is severely limited.” While this ultimate goal may be legitimate, according to the court, the State may not pursue it through a “flat proscription of non-Texans.” Id.

In addition to demonstrating that a valid factor unrelated to economic protectionism justifies a discriminatory statute, a state must prove that neutral alternatives adequate to protect the interests at stake are unavailable. The court believed that, “[i]n this age of split-second communications by means of computer networks, fax machines, and other technological marvels,” other neutral, less burdensome options are available that will allow the State sufliciently to check the backgrounds of applicants for alcoholic beverage permits and licenses.4 Id.

Thus, the court concluded that the State failed to demonstrate “‘the unavailabiity Id. of nondiscriminating alternatives adequate to preserve the local interests at stake.“’ (quoting Wyoming v. Oklahoma, 502 U.S. 437, 456 (1992)). Indeed, according to the court, “[s]o long as an applicant meets the necessary qualiications and comports himself according to the governing standards, the State would be hard-pressed to offer a justification substantial enough to authorize a wall prohibiting equal competition of non- Texans in the retail liquor business.” Id.

‘In the words of the United States Court of&peals for the Fii Circuit: Nonresident liquor lioznse applicants may be squired to timdsh whatever information the state dcms wcemaly, togdhet with a telease to permit rigomus vc-thieation checks. The ststc’s pens&s for dupIieity should apply equally to resident or nonresident Pertnit-holders, as may its provisions requiring the furnishing of bonds by permit holders. Out-of-state applicants may be required to file a consent to suit in Texas wuts. Texas law already denies applications to anpotations not organized under the laws of Texas, [Alan. Bev. Code 0 109.531, and a holder-corporation that violates the State’s laws faas revocation of its permit, dissolution of its corporate charter, and other civil and criminal penaJties. The entity’s employees or supmisors can, of anuq be criminally prosmted rcgardks where they reside.

Cooper, 11 F.3d at 554. *5 (DM-36 1)

The State of Texas also argued in Cooper that the Twenty-first Amendment to the United States Constitution provides the states “carte blanche authority to manage the flow of alcohol within their borders.” Id. Section 2 of the Twenty-first Amendment provides: “The transportation or importation into any State. for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited.” U.S. Const. amend. XXI, 5 2, quotedin Cocper, 11 F.3d at 554-55.

The wurt acknowledged that, for a time, the United States Supreme Court held the Twenty-first Amendment to grant the states “almost unfettered authority to regulate wmmerce in intoxicating liquors unwnstrained by” dormant Commerce Clause restrictions. Id. at 555 (citing, as an example, State Bd. of Equalization v. Young’s Market Co., 299 U.S. 59,62-63 (1936)). More recently, however, the Supreme Court has concluded that the Twenty-first Amendment does not completely remove state regulation of alcoholic beverages from the realm of the Commerce Clause. (citing Bacchs Imports, Ltd. v. Dias, 468 U.S. 263,275 (1984)).

To determhte whether the Twenty-first Amendment bmmmizes a particular state statute from invalidation under the Commerce Clause, the state must demonstrate that tbe inte-rests implicated by its regulation “‘are so closely related to the powers reserved by the Twenty-tirst Amendment that the regulation may prevail, notwithstandmg that its requirements directly wutlict with express federal policies.*” Id. (quoting Gpikzl Cities Cable, Inc. v. Crisp, 467 U.S. 691, 714 (1984)). The court found unpersuasive the . State’s asserttons that the State’s interest in investigating the background of applicants for

alcoholic beverage permits and licenses by discriminating against nonresidents was within the “‘core wncerns” of the Twenty-first Amendment. Id. Consequently, the court concluded that the residency requirements were subject to the Commerce Clause’s nondiscrimination requirement and were, therefore, unwnstitutional.5 at 555-56.

During the pendency of the appeal in Cooper, the Seventy-third Legislature amended the residency requirements throughout the code to require an applicant for a permit or license to have resided in Texas for one year prior to the date the individual submits the application.6 See Act of May 29, 1993, 73d Leg., R.S., ch. 934, $4 21, 24,

%r light of the court’s conclusion in Cooper, the court did not consider the validity of the =id-Ynq uirements mdet the privilege6 and Immwities Clause, U.S. Const. art IV, g 2. Cooper, 11 F.3d at 5% 11.10.

ti Cooper court recognized the le&lature’s actions in r&ion to its decision that the 1993 am&memstothcmdedidnotmootthecase. Id.at550-51. Thecomtstatcdthstthecnaumentofthe amendments would not prevent the legistamre from matoting the three-year residency requiremutt if the court in Cooper found the requirement constitntional. at 551. Furtlxem~on, the taut said that, atthough the one-year residency requirement may leasen the hmden placed on out-of-state applicants. the cdde continues to treat applicants who are not Texas cittzens differently from applicants who am Texas r&tents. We assume the court did not nde on the merits of the cnrrent one-year residency mqnirement because the come discussed the one-year residency reqnirement in the context of its threshold *6 (DM-36 1) 90, 1993 Tex. Sess. Law Serv. 3954,3960-61,3962,3983-84. The legislature also added section 6.03 to the code, summa&i ng the history of the code’s durational residency requirement and articulating a rationale for continuing the residency requirement, although shortening the period to one year: primarily, to keep organized crime from infiltrating the state’s alcoholic beverage industry.7 See id. 3 16, at 3957-58 (codified as Alto. Bev. (footnote mntinocd)

mnch&n that the amended law did not moot the cast; the court did not discuss it in addmssing the merits. See id. at 550-51.

%ection 6.03 of the mdc provides in p&tincnt part as follows: (a) It is the public policy of this state and a purpose of this section to sequin that, accept as provided in Subsection (k) of this section or othcrwisc in thiscode,apamitorliccnsemaynotbeissuedtoapeMnwhowasnotacitizm uf this state for a one-yrar period preceding the date of the filing of the person’s application for a license or permit. In that rrgard, the lcgislatnm makca the findings in Subsections @I) thm& (i) of this section. : (II) Betwrm 1920 and 1933, the &ion and mnmmption of alcoholic w was pmhibited in the United States. While the idcal&ic motivca behind Pmhiition were n&k, a law enf ormmentntgbtInamensucd. otherwise law-abiig citizens rodnely violated the law by buying and mnanning aImbolic beveragea. The demand for the illegal pmduds created an opportunity for criminal elements to develop a nationst nmrk for the supply and distriition of alcoholic kverages to the pop&m. Massive criminal empirca were built on illicit pmfits fmm these unlwvful activities and organized crime openly flourished in Chicago, New York, New Orleans, and other cities. (c) Daring prohibition, the illegal cntcrprisea used their nationsl wholesale distribution networks to exert control over their customers. A common operating proctdurewastoscllalcoholicbcvo‘agetoa~onlibcraltmnsto ensnarl the owner in a web of debt and control with the aim of forcing the owner to engage in other ille8al busincas enterprizea on the premises including gamblin& prostitution, and the d&ribution of illegal drugs.

(d) In 1935, when the sale of alcoholic bcvem8es was legalized in this state following the adoption of the Twenty-first Ammdment to the united states ConstiMion, the state was faoed with building an entirc fmmewurk for (hc distriiution of alcoholic bevcra8e products. An important mncwn was that sincc crhnb& owned and mntrollcd the oxis@ ilh+ alcoholic borage distriition system, aiminals would attempt to own and control the newly legalized huhtry. In an effort to prcvcnt this situation, mmpmbensivc laws werc~tocnsunthataaalcoholickveragcpmnitorLicenscmuldbe ismcdonlytocitizcnsofthestatewhohadlivedinthisstateforatlcastthree years, thns, long enongb to be known by their mmmunity and neighbors. (e) Under the newly de&ned rc8ulato~ scheme, permits and licenses issued by the state did not grant the holda a right Rather, the holder was gmntcd a privilege that mold be challenged a1 both the county and the state level if the character or qoaUimtions of the applicant were mspcct.. . .

(0 The alcoholic beverage laws adopted by the legislah~~ in the 1930s to free the industry from the influence of organized crime have been successful in *7 Code § 6.03(a) - (9)). Additionally, the legislature voiced some concern about preventing “unfair competition” and “decreased opportunities for small businesses.” See id. 5 16, at 3958 (codified as Alto. Bev. Code § 6.03(g)).

In our opinion, a court would assess the constitutionalii of the one-year residency requirement about which you ask using an analysis similar to that which the court used in Cooper. Preliminarily, we think the court would ascertain whether the statute fell within the scope of the Twenty-first Amendment and was thereby immuniz..ed from invalidation under the Commerce Clause. The court’s analysis would center upon whether the state law serves interests “closely related to the powers” the Twenty-first Amendment reserves to the states. See Cooper, 11 F.3d at 555. If not, the court would proceed to analyze the statute under the Commerce Clause, using the. two-tiered analysis the Supreme Court has set forth. See id. at 553.

The court would determine whether the statute directly discriminates a@nst out- of-state residents or whether the statute evenhandedly re.gulates in-state residents and out- of-state residents. See id. If the court finds that the statute is among the former, the state must demonstrate to the court’s satisfaction that a valid factor unrelated to economic protectionism justifies the discrimination and that an adequate neutral alternative is unavailable. See id. at 554. On the other hand, if the court finds that the statute is among the latter, the court must assess whether the statute linthers a legitimate state interest and (feotnete continued)

this state. The almbolic beverage industry in this state is Rot domiaated by organized crime. However, the legislature dees find that organized crime mntinuea to be a threat tbat should aever be allowed to establiih itself in the almbolic beverage industry in this state.

(g) To accemmodate the interests of the mnmmtag public, the expamion of popular nationwide busineasea, aad the increasing state interest la tonrism, andatthesametimetoguardagainstthethreatsoforganizedcrime,unfair mmpctition, and deueased opp~rtunitiea for small busi-, the legislahue lid that there is no longer neat for the Wee-year residency requirements with regard to those segments of the industry that sell alcoholic beverages to the ultimate consumer only. The legislature finds that it is d&able to retain a one- year residency requiremat for businesses that sell to the cemumer padrasad liquor and fort&d wine capable of being used te supply legal or illegal bars and clnhs. The legislature also tinds it reasoaable, desirable, aad in the best intmsts uf the state to provide a one-year reatdeney requirement for basiaesses engaged in the wholesale disnibution of beer, malt liquor, or wine or in the manw%cture and distribution of distilled spirits and fordtied wines at both the wholesale aad the retail levels where those beverages, in unopened mntainers, are sold to mixed beverage pcrmitteea and private club regisuation pcmttttees as well as to the general poblic. Adequate pmtection is deemed to be provided by mntmlling these sources of supply for distilled spirits and fortified wina.

whether the burden on interstate commerce clearly exceeds the local benefits.8 See id. at 553.

Ah of the issues involved in a court’s analysis of the constitutionality of the one- year residency requirement in the Alcoholic Beverage Code involve the resolution of fact questions. The resolution of fact-based questions is inappropriate to the opinion process. E.g., Attorney General Opinions DM-98 (1992) at 3; H-56 (1973) at 3; M-187 (1968) at 3; O-291 1 (1940) at 2.

SUMMARY All of the issues involved in a court% analysis of the constitutionality of the Alcoholic Beverage Code’s one-year residency requirement involve the resolution of fact questions. DAN MORALES Attorney General of Texas JORGE VEGA

Fii Assistant Attorney General

SARAH J. SHIRLEY

chair, opiion committee

Prepared by Kymberly K. Oltrogge

Assistant Attorney General

8A mart atso might consider whether the statute violates the Privileges aad Immunities Clause, U.S. Gxst. an. IV, 8 2. See supro note 5.