Thursday, September 16, 2010

Illinois Beer Distribution Law Discriminated Against Out-of-State Brewers

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide.

The Illinois beer wholesalers law, as construed by the Illinois Liquor Control Commission, unconstitutionally discriminated against out-of-state brewers by permitting in-state brewers to distribute their products directly to retailers while withholding that privilege from out-of- state brewers, the federal district court in Chicago has ruled.

The judicially-selected remedy for that discrimination—withdrawal of the self-distribution privilege from in-state brewers rather than extension of the privilege to out-of-state brewers—was temporarily stayed until March 31, 2011, to provide the Illinois General Assembly an opportunity to act on the matter, if it so desired.

Acquisition of Distributor

Out-of-state brewer Anheuser-Busch, Inc. brought suit after a ruling by the Illinois Liquor Control Commission found that its planned acquisition of a 100% ownership interest in an Illinois distributor would violate the beer law, which precluded out-of-state brewers from possessing an ownership interest in a licensed Illinois distributor.

According to the Commission, in-state brewers were permitted to perform the distribution function in Illinois, but out-of-state brewers like Anheuser-Busch were prohibited from doing the same.

Under the Commerce Clause, a law discriminating against interstate commerce is subject to a rule of virtual per se illegality. To avoid the rule, the state must demonstrate that the law advanced a legitimate local purpose that could not be served by reasonable nondiscriminatory alternatives.

Twenty-First Amendment Analysis

The Commission argued that the discrimination at issue affected Anheuser-Busch only insofar as it wanted to act as a distributor. It did not affect Anheuser-Busch in its capacity as a brewer. In applying a Twenty-First Amendment analysis, the Commission concluded that the discrimination was constitutional as long as it had some connection to the distributorship or retail tiers of a state’s three-tier alcoholic beverage licensing system.

The court disagreed, finding that the cases cited by the Commission did not support that view. Those cases held that the Twenty-First Amendment permitted states to enact laws that distinguish between retailers and distributors based on the location of their operations only where discrimination against out-of-state producers was not an issue.

Legitimate Local Purpose

In order to demonstrate a legitimate local purpose that was advanced by the beer law’s discrimination, the Commission contended that Anheuser-Busch’s exclusion from the distributor tier was justified by (1) the relative small size of the current in-state brewers, as compared with Anheuser-Busch, and (2) the importance of regulatory control and the risk of tax evasion.

The argument regarding the small size of the in-state brewers currently distributing beer in Illinois failed because the beer law permitted all in-state brewers to distribute, not just small in-state brewers, and prohibited all out-of-state brewers from distributing, not just large ones, the court determined.

The Commission failed to cite evidence to support its second—regulatory and tax—argument. Case law interpreting the Commerce Clause demanded more than mere speculation to support discrimination. The Commission also failed to establish that the state’s regulatory objectives could not be achieved through nondiscriminatory means.

Because the legislative process offered more flexibility for solving the constitutional deficiency than was available judicially, the enforcement of the court’s chosen remedy was temporarily stayed to permit the legislature to avail itself of a much broader range of possible solutions, if it so chose.

The decision is Anheuser-Busch, Inc. v. Schnorf, CCH Business Franchise Guide ¶14,458.

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