On June 26, 2019, the U.S. Supreme Court ruled in a 7-2 decision that Tennessee’s residency requirements for retail liquor store licenses were unconstitutional. Relying on the Commerce Clause of the U.S. Constitution and analyzing the Twenty-first Amendment, the Court found that Tennessee’s rules discriminated against out-of-state goods and nonresidents by adopting protectionist measures. Although the ruling itself is about liquor sales, the opinion could have implications for state licensing and the interstate commerce of cannabis after federal legalization.
Tennessee’s residency requirements
The state of Tennessee historically imposed residency requirements for persons and companies seeking to obtain a license to operate a liquor store in the state for off-premises consumption.1 To obtain a license, an individual had to show that they were “a bona fide resident” of Tennessee for the previous two years; and to renew, show continuous residency for 10 consecutive years.2 Corporations could not obtain a retail license unless all of their officers, directors, and owners of capital stock satisfied all of the same durational-residency requirements, effectively precluding any publicly-traded companies from operating a liquor store in Tennessee.3 Notably, out of concern that these requirements were unconstitutional, the Tennessee legislature later included a statement of intent that protection of “the health, safety and welfare” of residents required “a higher degree of oversight, control and accountability for individuals involved in the ownership, management and control of such outlets.”4
In 2016, two companies – Total Wine and Kimbrough Fine Wine & Spirits – applied for licenses to own and operate liquor stores in Tennessee, although they did not satisfy the durational-residency requirements. Although the Tennessee Alcohol Beverage Commission (TABC) recommended approval of the applications, the Tennessee Wine and Spirits Retailers Association (Association), a trade group of in-state liquor stores, threatened to sue to block the move. The TABC filed a declaratory judgment action in state court, asking a judge to determine the constitutionality of the state’s requirements. Over the next three years, the case made its way through the courts, ending with the Supreme Court’s decision in Tennessee Wine and Spirits Retailers Assn. v. Russell F. Thomas et. al. (June 26, 2019) declaring the state’s durational-residency requirement to be unconstitutional.
The Court’s decision in Tennessee Wine turns primarily on the Commerce Clause of the U.S. Constitution, which grants Congress the power to regulate commerce among the states.5 The corollary to this power is that the Commerce Clause also prohibits state laws that unduly restrict interstate commerce, known to law students and scholars alike as the “dormant Commerce Clause.”6 The history and reach of the dormant Commerce Clause are beyond the scope of this client alert; however, as the Court notes in Tennessee Wine, as a general matter, the dormant Commerce Clause only allows a state to discriminate against out-of-state goods or nonresidents if the law is “narrowly tailored to ‘advanc[e] a legitimate local purpose.”7
The Association did not defend the law under this “narrowly tailored” test, relying instead on section 2 of the Twenty-first Amendment for its argument, which provides that 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.”8 The Court made it clear, however, that section 2 does not ban the import of alcohol “in violation of any state law” since that would “lead to absurd results.”9 Considering the legislative intent behind section 2, the Court found that there was “no evidence that §2 was understood to give States the power to enact protectionist laws.”10 Indeed, “the aim of §2 was not to give States a free hand to restrict the importation of alcohol for purely protectionist purposes.”11 The exception to this general rule was where state laws were enacted “in the exercise of its police powers … applied only to bona fide health and safety measures.”12
Reading the Tennessee durational-residency requirements through the lens of this legal analysis, the Court declared that “it would be hard to avoid the conclusion that their overall purpose and effect is protectionist.”13 Notably, the Court flatly rejected the Association’s argument that the regulations could be justified as a public health or safety measure, characterizing it as “at best a highly attenuated relationship” devoid of “any ‘concrete evidence.’”14 The Court found that the two-year residency requirement is not needed to “enable the State to maintain oversight over liquor store operations” or to “promote responsible alcohol consumption.”15
Implications for cannabis
Cannabis remains illegal under federal law as a Schedule I controlled substance under the Controlled Substances Act (and related regulations),16 meaning interstate commerce of cannabis also remains illegal under federal law. To date, state laws permitting the intrastate cultivation, manufacturing, and distribution of cannabis have not allowed for the export of cannabis into other states.17 So the decision in Tennessee Wine does not have any current implications for cannabis; however, if and when the federal government removes cannabis completely from Schedule I, the decision does raise a number of questions and observations about how post-legalization state permitting and interstate commerce of cannabis will be implemented.
- Tennessee Wine continues a long line of Supreme Court case law striking down state laws limiting the interstate trade of goods. The decision suggests that attempts by states to generally prohibit or otherwise frustrate the import of cannabis products from other states would be unconstitutional.
- Residency requirements for ownership of cannabis permits (such as those currently in place in some states) could suffer a similar fate
- If states cannot implement protectionist measures against out-of-state actors, how does that affect the value of in-state distribution licenses
- Would states that only wanted to permit the sale and distribution of cannabis for medical purposes be able to prohibit the import of cannabis for adult use?
- The Court rejected the Association’s arguments in Tennessee Wine that durational-residency requirements for retail liquor sales permitting promoted public health and safety. Would retail sales of cannabis – which, for adult use, is a similar consumer product to alcohol – be viewed through the same lens, or be treated by a court with a higher level of public health and safety consideration?
- Would the Court’s unequivocal statement that the interstate commerce of alcohol beverages generally cannot be frustrated by protectionist state laws invite a consolidated interstate distribution system for cannabis similar to the current three-tier system for alcoholic beverages?
Needless to say, the implications of Tennessee Wine for the cannabis industry are speculative, for now. Nonetheless, in the event of federal legalization, this case could call into question existing state laws restricting ownership of cannabis businesses and have profound effects on the structure and conduct of distribution.