Public Ownership Ban of Liquor Stores Survives. Texas Wins on Dormant Commerce Clause as 5th Circuit Vacates and Remands District Court

The first federal court decision on a state’s alcohol laws analyzed under the dormant Commerce Clause since the recent Tennessee Wine and Spirits Retailers Association case has now been handed down and the state of Texas is the beneficiary.

The issue is a Texas law (22.16) that bans public ownership of liquor store retailers.  On its face this law presents no in or out of state discrimination.  Texas public corporation retailers like HEB or Southland (7-11) are banned from selling liquor the same way as out of state companies like Walmart or Safeway are banned.  Recall Texas had appealed its loss at district court on the dormant Commerce Clause issue and Walmart had appealed its loss on its Equal Protection challenge.   The Court affirmed the district court’s judgment that Section 22.16 does not violate the Equal Protection Clause but it vacated and remanded the district court’s decision finding 22.16 violated the dormant Commerce Clause.  The court also vacated the district court’s order enjoining enforcement of section 22.16.

The 5th Circuit vacated the district court because it “erred in its findings regarding the discriminatory nature and burden imposed by the public corporation ban.”  The 5th Circuit examined the recent Tennessee Retail case, 5th Circuit precedent, and relevant Supreme Court precedent.

The 5th Circuit noted that the burden of establishing a challenged law has a discriminatory purpose under the Commerce Clause falls on the party challenging the provision.  The court looked at the factors the district court used to determine discrimination and found fault with several of them.  One item it noted is that the admission of a legislative body that it sought to create a law to survive a constitutional challenge is not evidence of discriminatory legislative purpose.   With state alcohol laws always changing  (1,700 changes in the past 6 years) with legislatures reacting to court challenges or local public health concerns, a court’s failure to recognize this constant legislative fine tuning would be a recipe for all state laws to be struck.  Moreover, the Supreme Court has noted that “the allocation of the burden of proof and the presumption of legislative good faith are not changed by a finding of past discrimination.    The 5th Circuit recognized and did not support the perpetual cloud of doubt on state legislation that Walmart was trying to cast over Texas laws drafted in response to constitutional rulings from a court.  The Court agreed with the Supreme Court that each law must be measured on its own merits. The Court noted “states should be able to respond to a court deeming one of its laws unconstitutional.”

The 5th Circuit notes that the Supreme Court’s 1978 Exxon v. Maryland decision is the controlling case for considering a facially neutral statue that bans particular companies from a retail market.  (“The Commerce Clause protects the interstate market, not particular interstate firms”)

The 5th Circuit sent this case back to district court to weigh factors for its application of the Pike v Bruce Church balancing test and for its examination of determining an intentional discriminatory purpose by Texas.  The district court will presumably call for additional briefing and evidence on these points unless Walmart seeks to appeal this decision to the United States Supreme Court.

(previous postOral Argument Held In 5th Circuit for WalMart Challenge to Texas Liquor Laws

The Fifth Circuit held oral argument on April 29th on Walmart’s challenge to Texas liquor laws impacting the number of Walmart stores that can sell liquor.  The hearing was in New Orleans and held before Judges Davis, Haynes and Graves.  I did not attend this hearing so I am unable to offer any perspective on body language of the judges.   Listening to the hearing shows an engaged court who challenged all sides.   The hearing seems to show one judge somewhat supportive of Walmart, one somewhat of the state and one judge who did not say much at all.   A link to the recording of the transcript can be found here.

A decision is expected this summer and the pending Supreme Court review of the Tennessee Wine and Spirits Retailers Association matter will presumably impact parts of the 5th Circuit’s opinion.

(previous post)  Final Briefing Filed in 5th Circuit on Walmart Challenge to Texas Laws on Liquor Sales

Amicus briefs in support of Walmart were recently filed by the Pacific Legal Foundation/ Retail Litigation Center and the Institute for Justice.   Final reply briefs by the Texas Package Store Association and the state of Texas were filed this week.   The 5th Circuit has several hundred pages of briefing to wade through as it resolves issues related to the dormant Commerce Clause, Equal Protection Clause and various attempts to highlight facts/balancing tests to support each side.

Oral argument at the 5th Circuit will presumably be scheduled for some time in early 2019.   However, the pending United States Supreme Court review of the Tennessee Retailers Association case will be likely be heard before the 5th Circuit schedule is released.  Each side made reference to the pending case but do not hinge their arguments on resolution of the Supreme Court matter. The Supreme Court will hear the Tennessee Retailers case on January 16, 2019.

(earlier post)  Walmart Files its Principal and Reply Brief With 5th Circuit

Walmart filed a comprehensive 81 page brief with the 5th Circuit as its principal and cross-appeal brief as well as a reply brief to the briefs of the state, package stores and amici.

To recap the Questions Presented on appeal are: 1) Did the District Court correctly hold that Texas’s law forbidding “public corporations” from obtaining a package store permit violates the Commerce Clause? 2) Did the District Court correctly hold that Texas’s arbitrary limit on the number of package-store permits an entity may obtain violates the Equal Protection Clause? 3) Did the District Court act within its discretion when it remedied the Equal Protection violation by extending benefits to the excluded class?

On cross appeal Walmart asks the 5th Circuit to also resolve: 1) Does the public-corporation ban violate the Equal Protection Clause?  2) Does the arbitrary permit limit violate the Dormant Commerce Clause?

Walmart’s briefing spends the bulk of its arguments beating the “discriminatory” drum.  The Walmart brief mentions the word discrimination or a variation of that term over 130 times in this brief.  Walmart uses this concept of being discriminated against to advance both its Equal Protection claims and dormant Commerce Clause challenges.

Earlier,  main briefs were filed by the state of Texas and intervener Texas Package Store Association.   Amicus briefs were filed by all three tiers with briefs by NBWA, American Beverage Licensees and Presidents Forum for Distilled Spirits, Spec’s Family Partners and the Texas Wholesaler Beer Distributors Association.

After the state reply brief, oral argument will presumably be set for the first quarter of 2019.

(earlier post)  Wal-Mart’s victory in Texas Retail Case Heading to the 5th Circuit

The retailers in the Wal-Mart litigation have appealed Judge Pittman’s decision to the 5th Circuit.   Wal-Mart has cross appealed the portions of the dormant Commerce Clause claims they were unsuccessful in pursuing so both Equal Protection and dormant Commerce Clause issues will be before the 5th Circuit on appeal.   Briefing by the parties are due by the end of the summer.

(earlier post) Wal-Mart Prevails In Challenge to Texas Retail Ownership Laws

United States District Judge Robert Pitman has ruled for Wal-Mart on its challenge to Texas retail ownership laws.  The Order rules for Wal-Mart on its dormant Commerce Clause challenge to the public corporation ban and rules for Wal-Mart on its Equal Protection Challenge to the “consanguinity” exception to the five store limit.   As a result Judge Pitman has enjoined those laws as well as struck the five store limit law.

Under the dormant Commerce Clause analysis Judge Pitman held that the law banning public ownership of liquor retailing violates the dormant Commerce Clause because it was created with discriminatory intent.  Alternatively, even if there was no discriminatory intent, Judge Pitman believes the law would still not survive the more permissive Pike v. Bruce Church balancing test.   Judge Pitman said the public ownership law did not violate the dormant Commerce Clause’s for a discriminatory effect, nor did the Texas law’s five store limit nor the consanguinity exemption to the five store limit.

However, Judge Pitman did find the consanguinity exemption to violate the Equal Protection clause as it permitted unchecked consolidation through this exemption far in excess of Texas stated five permit store limit.  The court did not find any rational relationship to uphold this exemption to the five store limit law.  As a result, Judge Pitman struck the consanguinity exemption.  Moreover, he went further and struck the five store limit by extending the right to have more than five stores to everyone.

Judge Pitman did uphold the Texas law which prohibits certain beer and wine retailers from also holding a liquor package store license against both dormant Commerce Clause and Equal Protection challenges.

The Texas Package Store Associate was an intervenor and has noted that it expects to appeal this decision.

(Previous Post) District Court Rules for Texas on One Count, Keeps Two Counts Alive in Wal-Mart Litigation.

United States District Judge Robert Pitman has ruled on the Motion to Dismiss filed by Texas in the Wal-Mart litigation challenging public ownership of liquor stores.  Judge Pitman granted the motion to dismiss the Privileges and Immunities claim by Wal-Mart because it only applies to persons, not corporations.  However, Judge Pitman did keep alive the Commerce Clause and the Equal Protection claims filed by Wal-Mart.  The court noted that, at least at this stage, Wal-Mart has plead enough to survive a motion to dismiss and move to more discovery on these laws.  It is unknown whether Texas will appeal this ruling or whether this will move to discovery stage. The link to Judge Pittman’s order is here.

(Earlier Post) State Files Motion to Dismiss Wal-Mart Challenge to Liquor Sales Law, Wal-Mart Responds

The state of Texas has filed a motion to dismiss Wal-Mart’s lawsuit challenging public ownership of liquor stores in Texas.  In its brief the state notes that the plaintiff’s Equal Protection, Commerce Clause and Privileges and Immunities claims fail as a matter of law.  Mixing standard general police powers, court precedent (including relatively recent 5th Circuit rulings),  as well as 21st Amendment principles, the state suggests that the law clearly calls for the dismissal of this case.  The state notes recently attempted legislative activity and argues that this lawsuit “is no more than a thinly-veiled attempt to substitute Wal-Mart’s policy preference for the State’s long-standing regulatory framework governing package stores.” The state has long had the right to limit the number of outlets selling alcohol and to restrict harder alcohol from wider availability.

Wal-Mart’s response to the state’s motion to dismiss emphasized its belief that the Texas law is a non-permissible economic protectionist measure, that the Texas law discriminates against out of state businesses, and that Wal-Mart should have the right to develop facts to further its case so a motion to dismiss is premature. Wal-Mart signals an intent to rely heavily on past legislative hearings on the license limitation law in Texas and its grandfathered exceptions as part of that fact-finding effort.

The Texas legislature considered and did not pass legislation changing the law in question. The legislature is not in full-time session again until 2017.

(Earlier Post)  Wal-Mart Sues Texas Over Hard Liquor Restrictions

Wal-Mart has filed a lawsuit challenging the Texas laws restricting public ownership of liquor stores in Texas.    This lawsuit alleges that the Texas liquor store system violates the Equal Protection, Commerce Clause, and Privileges and Immunity clauses of the U.S. Constitution.   The complaint is very detailed and is beyond bare notice pleading.  There is even the statement in the complaint that “Wal-Mart Does Not Challenge the Three-Tier System in Texas…Wal-Mart supports the Texas three-tier system of manufacturers, distributors, and retailers.”

This lawsuit was filed and widespread publicity obtained on the litigation in the weeks before the Texas Legislature returns to full time session where Wal-Mart will presumably pursue a legislative solution.   In recent years, several different retail interests have filed litigation to assist their legislative arguments with varying degrees of initial success.   Equal Protection lawsuits are traditionally favorable for states, especially on state alcohol policymaking and I will post updates as they come.

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  1. […] the Tennessee decision may make it possible for supermarkets to sell spirits in Texas, which they can ‘t do currently because state law says only residents can get a license to […]

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