By Dave Simpson
November 29, 2018
The Seventh Circuit on Wednesday revived a wine store owner’s suit claiming Illinois’ alcohol distribution law that bans out-of-state wine retailers from shipping directly to consumers in the state is unconstitutional, finding that questions remain about the justification of the law.
In a unanimous decision written by U.S. Circuit Judge Diane Wood, the panel reversed a lower court’s decision to dismiss the suit by Lebamoff Enterprises Inc., an Indiana wine seller; its owner; and an Illinois-based wine aficionado, ruling that the Illinois district judge was “too quick” to accept the state’s argument that the Illinois Liquor Control Act of 1934’s regulation is allowed under the 21st Amendment to the U.S. Constitution and is needed to protect the interests of the state’s residents.
“It should have asked whether Illinois has justified requiring an in-state presence for retailers now that it allows state-wide mail-order sales,” the panel said. “… Perhaps Illinois can show that the differential treatment is necessitated by permissible 21st Amendment interests, but this sort of inquiry is ill-suited for the motion to dismiss stage.”
The panel remanded the case, while noting that Tennessee Wine & Spirits Retailers Ass’n v. Byrd, a suit dealing with whether the 21st Amendment allows states to regulate liquor sales by limiting licenses to those who live in the state for a period of time, is pending before the U.S. Supreme Court and that its outcome could harm the plaintiff’s chances.
Under the current Illinois law, in-state retailers can get a license from Illinois that allows them to sell, ship, and deliver wine directly to customers, but out-of-state retailers are prohibited from applying for such a license.
Lebamoff Enterprises filed its suit in September 2016, seeking a declaration that Illinois violates the Commerce Clause and the Privileges and Immunities Clause by discriminating against out-of-state wine sellers with respect to the sale to consumers. The Wine and Spirits Distributors of Illinois intervened on behalf of the state.
In June 2017, U.S. District Judge Samuel Der-Yeghiayan sided with the state, calling the constitutional challenges “mere red herrings” and saying that if the plaintiffs had their way, they would circumvent the three-tiered distribution system that the state put in place to limit underaged drinking, car accidents, and domestic abuse.
Their interest in selling booze in Illinois “does not provide them with unfettered access to Illinois markets to prey on Illinois consumers and reap profits without regard to the health and welfare of the Illinois public without complying with Illinois’ regulations and laws that are applicable to all,” Judge Der-Yeghiayan said in his dismissal.
The plaintiffs appealed, arguing that Illinois allows shipments of wine to consumers by in-state retailers, without requiring face-to-face points of sale and that the out-of-state retailers are unfairly kept out of that market.
“By allowing statewide shipments, Illinois has signaled that it is not quite so concerned about face-to-face sales,” the panel said. “At the same time, it has made its retailer licenses attractive to out-of-state businesses while barring those businesses from obtaining a license solely on the basis of state residency.”
In the provision prohibiting interstate shipments of wine, Illinois says that “direct marketing” is a “serious threat” to both the health of state residents and to the state’s economy.
On Wednesday, the panel said that Illinois must show why the regulations are important to further the goal of protecting its residents’ health, not just the state’s economy.
“The first reason touches the core of the 21st Amendment, while the second smacks of protectionism,” the panel said.
If Illinois can protect its residents from the possible dangers of mail-order wines through various additional requirements for licensing, why does it need to keep out-of-state retailers from gaining a license, the panel asked, while noting that it is still too early in the case to determine the answer to this and other key questions.
Representatives for the parties did not immediately respond to request for comment Thursday.
U.S. Circuit Judges Michael S. Kanne, Ilana D. Rovner, and Diane Wood sat on the panel for the Seventh Circuit.
The plaintiffs are represented by James Alexander Tanford of Epstein, Cohen, Seif & Porter LLP.
The interveners are represented by Richard J. Prendergast of Richard J. Prendergast Ltd.
The case is Lebamoff Enterprises, Inc., et al v. Bruce Rauner, et al, case number 17-2495, in the U.S. Court of Appeals for the Seventh Circuit.