Arnold's Wines, Inc. v. Boyle

Decision Date01 July 2009
Docket NumberNo. 07-4781-cv.,07-4781-cv.
PartiesARNOLD'S WINES, INC., d/b/a/ Kahn's Fine Wines & Spirits, Buy Rite, Inc., Doing Business as Crown Liquors, Joshua T. Block, Sharon Silber, Plaintiffs-Appellants, v. Daniel B. BOYLE, Chairman of the New York State Liquor Authority, in his official capacity, Lawrence J. Gedda, Commissioner of the Division of Alcoholic Beverage Control, in his official capacity, New York State Liquor Authority, Defendants-Appellees, Eber Brothers Wine & Liquor Corp., Charmer Industries, Inc., Metropolitan Package Store Associates, Inc., Intervenor-Defendants-Appellees.
CourtU.S. Court of Appeals — Second Circuit

Peter E. Seidman, Milberg LLP, New York, NY, (Sanford P. Dumain, Milberg LLP, New York, NY, James A. Tanford, Indiana Univ. School of Law, Bloomington, IN, and Robert D. Epstein, Epstein Cohen Donahoe & Mendes, Indianapolis, IN, of counsel), for Plaintiffs-Appellants.

Richard P. Dearing, Assistant Solicitor General (Barbara D. Underwood, Solicitor General, and Michael S. Belohlavek, Senior Counsel, Division of Appeals & Opinions, of counsel), for Andrew M. Cuomo, Attorney General of the State of New York, New York, NY, for Defendants-Appellees.

John F. O'Mara, Davison & O'Mara, P.C., Elmira, N.Y. (Harris Beach PLLC, Pittsford, NY, of counsel), for Intervenor-Defendant-Appellee Eber Bros. Wine & Liquor Corp.

Howard Graff, Dickstein Shapiro LLP, New York, NY, for Intervenor-Defendant-Appellee Charmer Industries, Inc.

Alan J. Gardner, Verini & Gardner, New York, NY, for Intervenor-Defendant-Appellee Metropolitan Package Store Association, Inc.

Sarah L. Olson, Wildman, Harrold, Allen & Dixon, LLP, Chicago, IL (Richard Harrison, Westerman Ball Ederer Miller & Sharfstein, LLP, Mineola, NY, of counsel), for Arthur J. DeCelle, Executive Vice President and General Counsel of the Beer Institute, Washington, D.C., for Amicus Curiae The Beer Institute.

Anthony S. Kogut, Willingham & Coté, P.C., East Lansing, MI, for Amicus Curiae The American Beverage Licensees Association.

Carter G. Phillips, Sidley Austin LLP, Washington, D.C. (Jacqueline G. Cooper, Sidley Austin, LLP, Washington D.C., Craig Wolf, Joanne Moak, and Karin Moore, Wine & Spirits Wholesalers of America, Inc., Washington, D.C., of counsel), for Amici Curiae Wine & Spirits Wholesalers of America, Inc., National Beer Wholesalers Association, and Sazerac Company.

Before: WALKER, CALABRESI, and WESLEY, Circuit Judges.

WESLEY, Circuit Judge:

This case asks us to chart a course between two constitutional provisions that delineate the boundaries of a state's power to regulate commerce, one an express grant, the other an implied limitation. Section 2 of the Twenty-first Amendment provides: "The transportation or importation into any State, Territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited." U.S. Const. amend. XXI, § 2. The Commerce Clause reserves for Congress the power "[t]o regulate Commerce ... among the several States," thus implicitly limiting the states' power to do so. U.S. Const. art. 1, § 8, cl. 3. Here, we must determine whether New York's alcohol regulatory regime is properly within the scope of section 2 of the Twenty-first Amendment, such that it does not run afoul of the dormant Commerce Clause. We conclude that the challenged regime is permissible under the Twenty-first Amendment insofar as it requires that all liquor sold within the State of New York pass through New York's three-tier regulatory system.

BACKGROUND

Appellant Arnold's Wines, Inc., doing business as Kahn's Fine Wines & Spirits, a wine retailer operating two stores in the Indianapolis, Indiana area, would like to sell its products directly to New York consumers. Appellants Joshua T. Block and Sharon Silber, New York residents, would like to be able to buy and receive wine directly from out-of-state retailers. Appellants thus brought this action in the United States District Court for the Southern District of New York against the New York State Liquor Authority and individual officials of the New York State Liquor Authority, pursuant to 42 U.S.C. § 1983, seeking a declaratory judgment finding sections 100(1), 102(1)(a), and 102(1)(b) of New York's Alcoholic Beverage Control Law ("ABC Law") unconstitutional to the extent that they prohibit out-of-state wine retailers from selling and delivering wine directly to New York consumers. Two licensed New York wholesalers and an association of licensed New York retailers were granted leave to appear as intervenor-defendants.

The district court (Holwell, J.), in a well-reasoned decision, granted defendants' motion to dismiss, holding that the challenged sections are an integral part of the three-tier alcohol regulatory system consistent with the authority granted to New York by the Twenty-first Amendment. Arnold's Wines, Inc. v. Boyle, 515 F.Supp.2d 401, 413-14 (S.D.N.Y.2007). Appellants timely filed this appeal.

A. New York's Regulatory Scheme

Sections 100(1), 102(1)(a), and 102(1)(b) of New York's ABC Law require that all liquor sold, delivered, shipped, or transported to a New York consumer first pass through an entity licensed by the State of New York. Section 100(1) states, "No person shall manufacture for sale or sell at wholesale or retail any alcoholic beverage within the state without obtaining the appropriate license therefor required by this chapter." N.Y. Alco. Bev. Cont. Law § 100(1) (McKinney 2000 & Supp.2006).1 The other two provisions make it illegal to ship alcoholic beverages to an unlicensed entity within the state (i.e., a consumer). Id. § 102(1)(a)-(b).

These provisions are part of the three-tier licensing structure for the sale and distribution of alcoholic beverages established in New York shortly after the passage of the Twenty-first Amendment. The main purpose of the three-tier system was to preclude the existence of a "tied" system between producers and retailers, a system generally believed to enable organized crime to dominate the industry. The three tiers are: (1) the producer, (2) the distributor or wholesaler, and (3) the retailer. Under this system, the producer sells to a licensed in-state wholesaler, who pays excise taxes and delivers the alcohol to a licensed in-state retailer. The retailer, in turn, sells the alcohol to consumers, collecting sales taxes where applicable. In New York, only in-state and out-of-state wineries may bypass the three-tier system to ship directly to consumers. Id. §§ 79-c, 79-d. All other out-of-state producers and sellers must ship to state-licensed wholesalers within the three-tier system. Id. § 102(1)(a)-(b); see also Arnold's Wines, 515 F.Supp.2d at 403-04.

This licensing scheme allows the state to oversee the financial relationships among manufacturers, wholesalers, and retailers, see N.Y. Alco. Bev. Cont. Law §§ 101, 105(16)-(17), 106(13)-(14), as well as the ways these entities price goods and make sales, see id. §§ 101-aa, 101-b(2)-(3). The State Liquor Authority may inspect any premises where alcoholic beverages are manufactured, stored, or sold, as well as the books and records kept on such premises. Id. §§ 18(4), 103(7), 104(10), 105(15), 106(12). New York asserts that the three-tier regulatory system allows the state to collect taxes more efficiently and prevent the sale of alcohol to minors.

Relevant in this particular case, New York-licensed retailers, the final tier in the state's three-tier system, may obtain off-premises licenses permitting them to deliver alcohol directly to consumers' homes "in vehicles owned and operated by such licensee[s], or hired and operated by such licensee[s] from a trucking or transportation company registered with the liquor authority." Id. § 105(9). New York retail off-premises licensees must comply with a set of highly detailed regulations governing the location, physical characteristics, and operating hours of their premises, as well as their financial relationships with producers and wholesalers, and the manner in which they keep books and records for all their transactions. Id. § 105(1)-(23). Out-of-state retailers without an in-state operation cannot obtain a New York retail off-premises license. It is this distinction — that New York-licensed retailers, but not out-of-state retailers, may deliver liquor directly to New York residents — that Appellants challenge in this case.

DISCUSSION

Appellants argue that New York's ban on direct sales to consumers by out-of-state liquor retailers discriminates against interstate commerce and thus violates the Commerce Clause. The Commerce Clause provides that Congress has the power to "regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes." U.S. Const. art. I § 8, cl.3. It is well established that the affirmative implies the negative, and that the Commerce Clause establishes a "dormant" constraint on the power of the states to enact legislation that interferes with or burdens interstate commerce. See, e.g., Dennis v. Higgins, 498 U.S. 439, 447, 111 S.Ct. 865, 112 L.Ed.2d 969 (1991). Thus, states may not pass laws that discriminate against out-of-state economic interests unless those laws "advance[ ] a legitimate local purpose that cannot be adequately served by reasonable nondiscriminatory alternatives." New Energy Co. of Ind. v. Limbach, 486 U.S. 269, 278, 108 S.Ct. 1803, 100 L.Ed.2d 302 (1988).

However, the Supreme Court has made clear that the Twenty-first Amendment alters dormant Commerce Clause analysis of state laws governing the importation of alcoholic beverages. E.g., Granholm v. Heald, 544 U.S. 460, 488-89, 125 S.Ct. 1885, 161 L.Ed.2d 796 (2005). Ratified in 1933, the Twenty-first Amendment repealed the Eighteenth Amendment and ended Prohibition. Section 2 of the Amendment provides: "The transportation or importation into any State, Territory, or...

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