Courts Address the Rights of Out-of-State Liquor Retailers and New Food Purveyors

Food and beverage businesses seeking to gain a foothold in a new place should be aware of two court decisions issued earlier this summer. The U.S. Supreme Court struck down a Tennessee law that imposed two-year residency requirements on people seeking a state liquor license, holding that the law violated the Dormant Commerce Clause of the U.S. Constitution. This decision followed the Illinois Supreme Court’s decision favoring local brick-and-mortar Chicago restaurants seeking to keep food trucks away.

The U.S. Supreme Court decision is already getting attention in cases outside of the food space. The Eighth Circuit has been asked to apply it to a case challenging a Minnesota transmission line licensing law that favors in-state over out-of-state applicants. See Letter to Clerk of Court, LSP Transmission Holdings, LLC v. Nancy Lange, et al., Case No. 18-2559 (8th Cir. Jul. 12, 2019).

Residency Requirements for Out-of-State Liquor Retailers Struck Down

In Tennessee Wine and Spirits Retailers Assn., No. 18-96 (U.S. Jun. 26, 2019), the U.S. Supreme Court invalidated a state law that did two things:

1. Prohibited individuals from getting liquor licenses if they had not been Tennessee residents for at least two years.
2. Prohibited people from renewing licenses if they had not lived in Tennessee for 10 years.

The law was even tougher on corporations and required corporations seeking a state retail liquor license to show that all of their officers, directors, and owners of capital stock satisfied the durational-residency requirements applicable to individuals. Tennessee Wine, No. 18-96, at *8.

Two entities and their owners challenged the law, which was defended in court not by Tennessee but by competing local retailers. The retailers argued that the 21st Amendment to the U.S. Constitution, which ended Prohibition, allowed states to regulate the “transportation or importation” of liquor when that transportation or importation violated that state’s laws. They argued that states therefore have greater leeway to regulate alcoholic beverages than they have with respect to regulating any other product.

The Court disagreed and struck down the law in a 7-2 ruling that united the liberal wing and conservatives Chief Justice Roberts and Justices Alito and Kavanaugh. Justice Alito authored the opinion, stating that “[b]ecause Tennessee’s 2-year residency requirement for retail license applicants blatantly favors the state’s residents and has little relationship to public health and safety, it is unconstitutional.”

The decision was based on the Dormant Commerce Clause, which prohibits state laws that unduly restrict interstate commerce. If a state law discriminates against out-of-state goods or non-resident economic actors, “the law can be sustained only on a showing that it is narrowly tailored to advance a legitimate local purpose.’” Id. at *15 (internal quotations omitted).

The Court affirmed that state alcohol laws that burden interstate commerce can serve a state’s legitimate interests, but “protectionism, we have stressed, is not such an interest.” Id. at *29 (citations omitted). And there was no evidence that the Tennessee law promoted public health or safety or that other non-discriminatory regulations were unable to serve the same purposes. Id. at *38.

The law may have implications for analogous Illinois laws. Illinois, for instance, has a law allowing in-state liquor stores to ship to residents but prohibiting out-of-state retailers from doing the same. See 235 ILCS 5/6-29.1(b).

Illinois also has a law like the Tennessee residency law and argued as amicus for the Supreme Court to uphold the Tennessee liquor licensing residency requirement. See 235 ILCS 5/6-2(a)(1). A former Illinois Solicitor General took the lead, arguing that states have an interest in promoting a system in which alcohol retailers have a connection to the local communities they serve and an understanding of those communities’ needs. Illinois and other states also argued the residency requirement helps states oversee the relationships among producers, distributors, and retailers to avoid tied-house systems. The Supreme Court rejected all of these arguments.

Illinois Keeps Food Truck Vendors at a Distance

The Illinois Supreme Court recently held that local brick-and-mortar restaurants can keep competing mobile food truck vendors away.

In LMP Services, Inc. v. City of Chicago, Chicago’s restrictive food truck regulations were upheld because the regulations did not unfairly protect local brick-and-mortar businesses and stifle competition.

Food truck owners challenged Municipal Code of Chicago sections 7-38-115(f), forbidding food trucks from operating within 200 feet of the entrance of “any business that prepares and serves food to the public” (this “200-Foot Rule” exempts food trucks serving construction workers) and 7-38-115(l), requiring that food trucks install GPS tracking devices so the City can track their locations (called the “GPS Rule”).

The food trucks argued that the 200-Foot Rule unreasonably favored brick-and-mortar restaurants and violated the due process clause of the Illinois Constitution and that the GPS Rule was an unconstitutional search and seizure in violation of the Illinois Constitution. The City of Chicago defended the local restrictions, arguing that they “guard[ed] those folks who’ve made substantial investments in the City of Chicago by buying restaurants,” and served “to protect the many benefits that ‘brick and mortars’ [ ] bring to Chicago.”

Applying rational basis review, the court held that the 200-Foot Rule was constitutional because the City has a legitimate government interest in promoting brick-and-mortar restaurants that stabilize and support the growth of neighborhoods and pay property taxes. The court noted that food trucks do not have the same long-term impact on the community. The court stated that the 200-Foot Rule did not operate as a total ban on food trucks but instead applied reasonable restrictions on where the trucks could operate.

The Illinois Supreme Court also upheld the GPS Rule, reasoning that food trucks had little expectation of privacy in their locations, considering that some trucks advertise their locations publicly to attract customers. The court concluded that the City of Chicago has an interest in knowing where food trucks are in case there is a public health emergency and so that it can ensure that food trucks are complying with the laws. As a result, this ruling will require Chicago food truck operators to continue to comply with the 200-Foot Rule and the GPS Rule.

Takeaways

The U.S. Supreme Court’s decision will be welcomed by entrepreneurs and companies that develop an efficient business platform, have outstanding distributor and supplier contacts, offer the best prices, and offer the best customer service. Those businesses can scale up quickly if there are not burdensome roadblocks. The decision also allows those businesses and entrepreneurs to diversify by more easily gaining a presence in multiple states, and thereby better insulate themselves from purely local economic shifts or downturns.

As one of the justices stated at oral argument, Tennessee Wine opens the door to the possibility of “the Amazon of” wine. The U.S. Supreme Court’s decision may also apply to laws outside of the liquor context, including state licensing laws for other industries that favor in-state businesses over out-of-state competitors. The LMP Services decision on the other hand may represent an out-of-date way of thinking about competition.