21ST CENTURY CHALLENGESFOR

THE REGULATORS

Presented by

MAX HESSCHOREY, TAYLOR & FEIL

A Professional CorporationAtlanta, Georgia

Manuel v. State of Louisiana - the challenges

Plaintiffs challenged the following:

• ban on certain credit sales by a wholesaler to a retailer• ban on price discounts based upon volume in sales by a

wholesaler to a retailer• delivered-pricing requirement in sales by a wholesaler to a

retailer, e.g., a ban on giving a retailer a credit to reflect provision by the retailer of what would normally be a wholesaler service such as transport or warehousing

• ban on central warehousing by retailers• ban on the provision of distribution services by retailers• ban on sales or delivery by a wholesaler to retailers located

outside the wholesaler's territory

Manuel v. State of Louisiana – the decision

The Louisiana courts rejected all six Sherman Act challenges and upheld the State provisions. Unlike the 9th Circuit in Costco, the Louisiana courts upheld the State provisions both on the basis of antitrust law and on the basis of the 21st Amendment jurisprudence.

PRACTICE POINTERS FOR HOW TO DEFEND

Knee-jerk position. Supremacy Clause prefers Federal law over State law.

• In a Sherman Act challenge to State alcohol regulation, on the surface, it’s Federal law versus a State law. Not good odds for the State given that the knee-jerk reaction will be that Federal law is supreme over State law. One way to overcome the knee-jerk position is to kick it up a notch.

Kicking it up. Displace the Supremacy Clause model with the model of two equally self-respecting parts of the same Constitution, with this difference: One part amends the other.

• Compare, not Federal law to State law, but rather the constitutional authority for the Sherman Act (the Commerce Clause) with the constitutional authority for the challenged State alcohol law (the 21st Amendment). Then argue that the 21st Amendment trumps the Commerce Clause.

• Alternatively, argue that State policy pursuant to the 21st Amendment can be harmonized with Federal policy (e.g., the Federal Alcohol Administration Act) pursuant to the Commerce Clause and that, in cases of tension between the two, State policy is favored when it comes to alcohol regulation.

• Proposal for the future: Advocate for an altogether new model – more about that later

Putting the burden of proof on the plaintiff challenger.• Argue that the party challenging the liquor

regulation bears the burden of proof and that the regulation is entitled to a strong presumption of validity. That way, if there is a failure of proof, plaintiff loses and the State prevails.

• Even if successful in putting the burden on the plaintiff, go ahead and take on the task of showing the court why you regulate as you do. Stuff the record with rationales.

Stuffing the record with rationales: Avoid battles you cannot win. Don’t get trapped in narrow cause-and-effect

propositions that you cannot prove (and nobody else can either) – e.g., a la Costco, whether the challenged State law does or does not promote, in the sense of bringing about, lower per capita consumption averaged across the entire population of the State. Who can prove that?

Stuffing the record with rationales: Consider alternative approaches – 1st alternative.

One approach is to state the risks you are regulating against. What if they ask how you know that your regulation actually prevents the stated risk from occurring? Ask them right back, with a good dose of indignation, if we have to deregulate just to prove that there are risks in the beverage alcohol area worth regulating against.

Stuffing the record with rationales: 2nd alternative.

Another approach is to take the position that your rationale is not a cause-and-effect proposition, but rather part and parcel of the very structure of the three-tier system, which is unquestionably legitimate.

Stuffing the record with rationales: 3rd alternative.

Another approach is to define rationales both broadly and minutely. For instance, promoting temperance is not just about per capita consumption averaged over the population of the entire State, but also about such things as underage access and price wars (and intemperate consumption flowing therefrom) in a spot market.

Stuffing the record with rationales: 4th alternative.

Another approach is to make the case that each regulatory requirement is a component of a comprehensive system. If the comprehensive system promotes temperance and other goals, then so does each component part.

Another approach is to take the position that the State law or rule is an enforcement mechanism, designed to ensure compliance.

Stuffing the record with rationales: 5th alternative.

Stuffing the record with rationales: 6th alternative.

• Another approach is to take the position that the State law or rule is designed for regulatory and administrative efficiency, transparency, convenience, etc.

Stuffing the record with rationales: 7th alternative.

• Another approach is to take the position that the State law or rule is a prophylactic measure designed to prevent potentially untoward conditions from developing in the first place.

Retailer

Take a functional approach E.g., if bans were lifted on

volume discounts and central warehousing, a retailer could combine these practices.

A retailer would be able to integrate vertically from the lowest tier to the middle tier – in effect, functionally collapsing the two tiers

Manufacturer

Wholesaler

Stuffing the record with rationales: 8th alternative.

Kicking it down. Displace the Supremacy Clause model with the argument that Federal law, in the absence of interstate commerce, does not apply at all.

• Show, if you can, that the challenged State law regulates practices concerning the in-state distribution of beverage alcohol down to the in-state consumption by an in-state consumer.

• In other words, show that everything takes place in in-state commerce without any upstream effect on interstate commerce. Without interstate commerce, Federal law does not apply.

Kicking it down. A refinement: The State’s at-rest law as a legislatively determined demarcation between interstate commerce and intrastate commerce.

Consider arguing that the State’s at-rest law constitutes a legislatively determined demarcation between interstate commerce and intrastate commerce that the courts should respect.

Putting to maximum use antitrust doctrines favoring the States.

• In an antitrust case, there are a couple of doctrines designed to favor the several States. Make sure you drink every last beneficial drop. Here’s a sampling.

Putting antitrust doctrines to maximum use. Argue for rule of reason treatment rather than per se treatment.

• A Sherman Act plaintiff can only challenge a State law if the State law violates the Sherman Act in all applications of the State law. In practical effect, the plaintiff has to show that there is a per se violation. Per se violations are increasingly disfavored by the courts. Argue that the rule of reason approach – not the per se approach – should be applied to plaintiff’s challenge and then argue that the lawsuit should be dismissed.

Putting antitrust doctrines to maximum use. No concerted action, only unilateral action.• There is no Sherman Act violation if there is no

concerted action such as a conspiracy between two or more market actors. Argue that there is no such concerted action. Rather, market actors are simply following the unilateral command of the State law that has been challenged.

• If the Sherman plaintiff argues in response that the State law allows for hybrid action (e.g., that the State law creates a zone where private actors can once again conspire), make the plaintiff prove that there has been concerted action in fact within that alleged zone.

Putting antitrust doctrines to maximum use. Extending the Parker State-action immunity doctrine to State measures of all rankings in the area of beverage alcohol regulation.• The Parker State-action doctrine is designed to assess

Congress’s presumed intent for application of the Sherman Act to the States.

• More recent cases hold that Congress is presumed not to have wanted the Sherman Act to be applied to strike down a State policy that has been promulgated by an authoritative State organ such as the State legislature or the State high court.

• In the realm of regulating beverage alcohol, with the backing of the 21st Amendment, argue that Parker should be extended to show respect for State policy pronouncements of other rankings as well – such as acts by the Governor, State regulations, and State administrative interpretations and practices.

How to clarify and solidify the authority of the several States under the 21st Amendment to regulate beverage alcohol? Some proposals. • First proposal: Challenge the 4th Circuit (TFWS) and 9th

Circuit (Costco) effectiveness test as misguided, simplistic, incomplete, outdated, nonsensical.

• For instance, the Federal Government has authority to establish a prophylactic rule when regulating beverage alcohol. No showing is necessary that the rule is actually effective to prevent tied-house evil. Black v. Magnolia.

• Do the several States not have the same authority under the 21st Amendment? Do the States not have the authority to establish a prophylactic rule without proving that the rule is actually effective to prevent intemperance?

How to solidify 21st Amendment authority. Some proposals.

• First proposal, continued: Challenge the 4th Circuit (TFWS) and 9th Circuit (Costco) effectiveness test.

• For instance, at least since Granholm, the several States have unquestioned authority to establish and maintain a three-tier system of regulation.

• If the purpose of a challenged State law is to establish a part of that State’s three-tier system, does the State have to prove that the State law is actually effective in establishing that part of the State’s three-tier system?

How to solidify 21st Amendment authority. Some proposals.

• Second proposal: Advocate for a new model for integrating the 21st Amendment into the U.S. Constitution.

• One approach: Using commerce as a test,1. Where only in-state commerce is involved, the applicable State has

exclusive jurisdiction to regulate beverage alcohol2. Where interstate commerce is involved, the applicable State and the

Federal Government have concurrent jurisdiction.

• In the case of a conflict in exercise of that concurrent jurisdiction that cannot be reconciled, treat the State as having primary jurisdiction and the Federal Government as having secondary jurisdiction.

How to solidify 21st Amendment authority. Some proposals.

• Third proposal: One approach is to apply original intent, or originalism, theory. The framers and ratifiers of the 21st Amendment had Toward Liquor Control in mind as an outline of the myriad possible ways in which the several States would, upon adoption of the 21st Amendment, be authorized to regulate beverage alcohol.

How to solidify 21st Amendment authority. How to implement these proposals.• All of these proposals could be implemented in litigation by staking

out these positions when individual court challenges arise.• Alternatively and additionally, the NCSLA (perhaps together with

NABCA) could take advance preparations that could later be used in litigation or other fora.

• A proposal for implementation: • BE IT HEREBY RESOLVED that the NCSLA should commission or

undertake a white paper stating its position on the authority of the several States under the 21st Amendment to regulate beverage alcohol.

• BE IT HEREBY FURTHER RESOLVED that the NCSLA should commission or undertake a study demonstrating that Toward Liquor Control can be used as a fundamental document by which to interpret the meaning of the 21st Amendment.

Max HessMax Hessmhess@ctflegal.commhess@ctflegal.com