Major Retailer Locks Horns with Texas Over “Discriminatory” Liquor Laws

Arent Fox
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Arent Fox

In a lawsuit filed on June 29, 2021, in Texas state court, a major national retailer alleges that a Texas law restricting its retail locations from selling liquor to consumers violates the Texas Constitution. The retailer is asking the court for a declaratory judgment that Section 22.16 of the Texas Alcoholic Beverage Code is unconstitutional and for an injunction against the enforcement of the statute.

The Statute at Issue

Section 22.16 of the Texas Alcoholic Beverage Code prohibits public corporations from obtaining permits that allow for the retail sale of liquor in Texas (called “package store” permits) unless the corporation was grandfathered in prior to April 1995. The Texas legislature enacted the public corporation ban one year after a federal court struck down other provisions of the state Code that imposed in-state residency requirements for alcoholic beverage retailers, but legislators argued at the time that the public corporation ban was necessary to “promote accountability” within the retail liquor market, and “to have real human beings who are easily identifiable, who are close to the business, and who ultimately bear personal responsibility for the actions of the package store.”

In its petition to the court, the retailer (a public corporation) argues that Section 22.16 violates the Due Course of Law Clause and the Local and Special Laws Clause of the Texas Constitution. Among other things, the retailer argues that the effect of the public corporation ban is unreasonable and unduly burdensome and that it is meant solely to benefit existing package-store permittees by insulating them from competition. Moreover, it argues that the state arbitrarily excludes some public corporations from the liquor store market, while making exceptions for publicly traded hotel corporations and public corporations that held package store permits prior to 1995 (which were almost exclusively Texas-resident corporations).

Notably, the public corporation ban applies only to package store permits. Public corporations are allowed under Texas law to sell beer and wine at retail.

Prior Federal Litigation

The Texas public corporation ban was previously challenged in federal court on the basis that it violates the Commerce Clause and Equal Protection Clause of the US Constitution. After extensive discovery and a weeklong bench trial, a federal District Court held that the statute discriminates on interstate commerce and therefore violates the Commerce Clause, but the Fifth Circuit reversed, concluding that the District Court committed several errors in its evidentiary analysis.

Takeaway

State laws restricting retail sales of alcoholic beverages have become major targets for lawsuits and legislative repeal or reform. States have significant authority under the 21st Amendment to the US Constitution to regulate sales of alcoholic beverages, but the US Supreme Court’s 2019 decision in Tennessee Wine & Spirits Retailers Association v. Thomas, 139 S. Ct. 2449 (2019), underscored the limits of state authority. In Tennessee Wine, the Supreme Court concluded that, despite state authority under the 21st Amendment, a Tennessee law that imposed a two-year in-state residency requirement on alcohol beverage retail licensees was unconstitutional under the Commerce Clause. Since then, courts have enjoined other state laws imposing residency requirements, while upholding a Missouri statute requiring alcohol retailers to have a physical presence within the state, Sarasota Wine Market, LLC, v. Schmitt, 987 F.3d 1171 (8th Cir. 2021), and a Michigan statute allowing in-state, but not-out-of-state, retailers to ship wine directly to consumers, Lebamoff Ents. Inc. v. Whitmer, 956 F.3d 863 (6th Cir. 2020). Meanwhile, strong consumer demand for mail-order and direct shipping of alcoholic beverages has also prompted many states to revisit delivery restrictions that were adopted prior to the e-commerce boom. These trends suggest a gradual loosening of at least some state restrictions on alcohol beverage retail sales. If successful, this lawsuit would be one more crack in the dam.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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