LITIGATION BACKGROUNDER

Tennessee Wine and Spirits Retailers Association v. Blair

Can States Bar Newcomers from Owning a Business?

Doug and Mary Ketchum moved to Tennessee so they could own and operate a mom-and-pop liquor store there. Doing so would enable them to meet their two main goals:  earning a living and doing so in a way that gives them the flexible schedule they need to take care of their severely disabled and ailing daughter, Stacy. Moving from Utah was not merely a matter of choice for the Ketchums; the temperature inversion in Salt Lake’s valley caused one of Stacy’s lungs to collapse, making their move a matter of life and death.

And so they moved to Memphis to own and operate Kimbrough Towers Fine Wine, which would allow them to be available 24/7 for their daughter as she needed.

But the Tennessee Wine and Spirits Retailers Association—a lobbying arm representing the special interest of in-state liquor retailers—had different plans for the Ketchums. When it heard that the staff at the Tennessee Alcoholic Beverage Commission recommended the Ketchums be granted their retail liquor license, it threatened to sue the Commission for failing to enforce Tennessee’s liquor laws. In response, the Commission beat the Retailers Association to the punch, filing its own lawsuit and asking a court to declare whether Tennessee’s liquor laws were unconstitutional.

According to Tennessee’s law, to qualify for a retail liquor license, one must be a resident of Tennessee for at least two years; and to renew the license, applicants are required to have 10 years of in-state residency. The law blatantly discriminates in favor of in-state residents and against newcomers who move to Tennessee. So egregious are the violations, that even the Office of the Tennessee Attorney General declared the laws unconstitutional. Two federal courts—a trial court and a court of appeals—agreed.

The Ketchums’ case will be argued on January 16, 2018, before the U.S. Supreme Court.  The Institute for Justice represents Doug and Mary Ketchum.  IJ is fighting for their constitutional right to earn an honest living anywhere in America free from arbitrary and excessive government restrictions.

Doug and Mary Ketchum: Saving Their Daughter’s Life by Moving to Tennessee

Doug and Mary Ketchum had no choice but to move out of Utah. Their 32-year-old daughter, Stacy, suffers from cerebral palsy and one of her lungs collapsed when a temperature inversion in the Salt Lake valley severely worsened the air quality there. To save Stacy’s life, they had to find another place to live.

The Ketchums moved to Tennessee because they learned of a rare opportunity to purchase an historic liquor store called Kimbrough Towers Fine Wine. The store was frequented by legends like Johnny Cash, who used to record in Sun Studio, just a mile-and-a-half down the road. Becoming business owners would offer the Ketchums the flexibility necessary to spend as much time as they need to care for their daughter during the precious remaining years they have left together. In addition, it would supply them with a stable income to provide for themselves and their family.

In July 2016, about two months after they applied for the retail liquor license with the Tennessee Alcoholic Beverage Commission, the Ketchums left Utah behind and moved to Tennessee.

Tennessee Was Going to Grant the License Until the Retailers Association Came Along

The Tennessee Alcoholic Beverage Commission routinely granted retail liquor licenses to applicants, even if they were from out of state. True, the laws on the books prohibited anyone who has not resided in Tennessee for the period of two years from getting a license, and anyone who hasn’t resided there for the period of 10 years from renewing it. But the laws were so patently unconstitutional that even the Office of the Tennessee Attorney General admitted as much in two opinions it issued on the subject. Relying on those opinions, the Commission’s staff recommended that the Ketchums’ application be granted. But then the Tennessee Wine & Spirits Retailers Association got involved.

The Tennessee Wine & Spirits Retailers Association is a special interest group that exists to protect cartel members from competition, including keeping newcomers to the state from selling alcohol. It threatened to sue the Commission if the Ketchums’ application—and an application of one other candidate, Total Wine—were granted. To prevent this from happening, the Commissioner himself went to court, asking it to resolve the issue of whether the durational residency requirements were constitutional. In an ironic twist, it is the Tennessee Wine & Spirits Retailers Association, and not the State of Tennessee, that is now defending this law. Clearly demonstrating how in-state liquor interests are seeking to preserve their cartel, the Retailers Association has hired its own private outside counsel —rather than the Tennessee Attorney General—to defend its position before the U.S. Supreme Court. The Attorney General never so much as filed a brief with the High Court to defend this law, which it recognizes is unconstitutional.

Tennessee’s Law Prevents Newly Arrived Residents from Getting a License to Sell Alcohol

There are three parts to the Tennessee law being challenged by the Ketchums. First, if you are not a resident of Tennessee for at least two years, you cannot get a license to sell liquor. Second, if you are not a resident of Tennessee for at least 10 years, you cannot renew this license. (The license only lasts for one year, so if you want to operate a liquor store on a continuing basis, you would have to apply for a license in your ninth year of Tennessee residency and hope that your license would be renewed the following year.) Third, if you are a corporation, you cannot get a license unless every single one of your owners, directors and stockholders is a resident of Tennessee for at least two years—or 10 years for the renewal.

Moving from State to State to Earn a Living Is a Fundamental Right

By claiming that Doug and Mary cannot move to Tennessee in order to own and operate a liquor store as any other resident of the state might legally do, the Tennessee Wine & Spirits Retailers Association is trampling on an essential American right. First, it is violating the provision of the Constitution that prohibits states from discriminating against newly arrived residents. Second, it is violating another constitutional provision fundamental to the workings of our country; specifically, that states cannot discriminate against out-of-state economic interests.

The Privileges or Immunities Clause of the Fourteenth Amendment

Laws that discriminate against newly arrived residents of any state have a tainted history. After the Civil War, Southern states passed “black codes” that restricted the mobility of newly freed slaves, thereby preventing them from working for themselves. Vagrancy statutes, as one example, made it illegal to be without fixed residence and employment, making it impossible for freedmen to travel between the states in search of opportunities to earn a living. Fearing Northerners would move south to help freedmen exercise their newly acquired rights, Southern states also put in place impediments to unwelcomed white Northerners who would be newcomers to these states.

The Fourteenth Amendment of the U.S. Constitution, ratified in 1868, was designed to fix all that. In its very first section, it prohibits states from making or enforcing laws that “shall abridge the privileges or immunities of citizens of the United States.” Among such privileges or immunities is the right to travel freely between the states for the purposes of earning a living, exactly the right that Doug and Mary seek to exercise with their move to Tennessee. But the State of Tennessee, or more precisely the Tennessee Wine & Spirits Retailers Association, apparently did not get the message. The Retailers Association insists on either keeping the Ketchums out of Tennessee or preventing them from exercising this fundamental American right.  Under the Privileges or Immunities Clause, once you reside in a certain state, you can exercise the same rights as any other citizen of that state, and that is exactly what the Institute for Justice, which represents the Ketchums, seeks to vindicate.

The Commerce Clause

There is another reason why Tennessee’s durational residency law is unconstitutional; it violates the Commerce Clause, which was enacted to prevent trade wars between the states. The Clause prohibits treating in-state economic interests more favorably than out-of-state ones. While efforts to engage in this kind of protectionist behavior may have a short-term benefit for in-state special interests who seek to use government power to insulate themselves from competition, this practice is disastrous if the goal is to preserve the national union. The Tennessee durational residency law treats the in-state retailers more favorably than the out-of-state ones, completely shutting out newcomers from out-of-state who have the desire and resources to compete in the Tennessee market. This is exactly the kind of parochial protectionist behavior the Framers were worried about when they included the Commerce Clause in the Constitution.

Last Gasp of a Private Special Interest Group

The Tennessee Wine & Spirits Retailers Association twice failed in defending the durational residency requirement. First, a federal district court in Tennessee declared the law unconstitutional. Then, 10 months later, the Sixth U.S. Circuit Court of Appeals did the same. Both times the Tennessee Wine & Spirits Retailers Association argued that because the in-state regulation of liquor is protected by the Twenty-First Amendment to the U.S. Constitution, a state could discriminate against newcomers all it wants, other constitutional provisions notwithstanding. And both times the courts rejected this reasoning, making it clear that the power to regulate liquor under the Twenty-First Amendment has its limits.

The U.S. Supreme Court will hear the Ketchums’ case on January 16, 2019. The question before the Court is whether the Twenty-First Amendment empowers a state to withhold a retail liquor license from folks like the Ketchums simply because they have not resided in the state for a specified number of years.

Call Them What They Are:  Bottleneckers

There is a new name for private special interest organizations like the Tennessee Wine & Spirits Retailers Association that rent out government power and then use that power to keep out competition, thus maximizing their own profits. These private interests are called bottleneckers.

After observing the protectionist behaviors of alcohol distributors in Swedenburg v. Kelly—the companion case to Granholm v. Heald dealing with interstate wine sales that the Institute for Justice litigated before the U.S. Supreme Court—IJ published an entire book documenting how self-interested trade organizations like the Tennessee Wine & Spirits Retailers Association capture government power and then use it for their own ends rather than to genuinely protect public health and safety. The book—which studies occupations including alcohol distributors, casket sellers and interior designers—shows how these bottleneckers arise, use scare tactics to justify new anticompetitive laws and regulations, then perpetuate these misuses of government power, thereby enriching the private special interests. As Bottleneckers coauthors Dick Carpenter and Chip Mellor observed:

Historically, the interruption of the flow of workers into occupations effected by licensing successfully preserved the advantages of those already at work in those occupations . . . .  [I]n the 1950s one in twenty workers in the United States needed a government-issued license to work, and some estimates put that number at almost one in three today.

And like the medieval guild system, new licenses are created by governments at the request of those already working within an industry, typically through professional associations. Currently, those already working in an occupation . . . often band together and work in association with legislators . . . to create a regimented license to shut out those who have not completed the designated requirements . . . in order to maintain a monopoly over their occupation. Representatives of those associations often warn of hyperbolic threats to public health and safety from the specter of unregulated practice—illustrating the need for licensing with a few doomsday anecdotes and no empirical evidence—and conveniently provide sample licensing legislation written by the association. Since occupational licensing is primarily handed out at the state level, it is a process repeated in one state capitol after another, usually as part of a deliberate campaign to regulate the industry . . . .

The term bottleneck originated not as a way to describe obstructions or obstructionists but as a metaphor for something narrow—a bottleneck harbor, for example—drawn from the physical properties of, well, the neck of a bottle. Applied to economic markets, the metaphor and its origin are particularly apt, for . . . the quintessential bottleneckers who dominate an industry whose stock-in-trade is captured in bottles: [those engaged in the sale of alcohol.].

Plain and simple, the actions of the Tennessee Wine & Spirits Retailers Association demonstrate that they are bottleneckers through and through, and government power must not be used to protect them from competition but, rather, it must be used to protect the rights of individuals like Doug and Mary Ketchum.

The Petitioners

The Tennessee Wine & Spirits Retailers Association is the sole entity that asked the U.S. Supreme Court to review the Sixth Circuit’s decision, which makes it the petitioner in this case. The State of Tennessee did not ask for the case to be reviewed, but since the petition to hear the case was granted, the state has essentially hidden behind the Tennessee Wine & Spirits Retailers Associations’ arguments to such an extent that the Attorney General’s office did not even file its own brief and fully adopted the Retailers Association’s positions in the case.

The Respondents

Affluere Investments—the corporation through which Doug and Mary own their liquor store—is one of the Respondents in the case. The other Respondent is Total Wine, the largest independent retailer of wine in the United States.

Claims

Doug and Mary Ketchum will make two claims. First, they will argue that Tennessee’s durational residency requirements violate the Privileges or Immunities Clause of the Fourteenth Amendment; they are being discriminated against because they are newly arrived residents. Second, Doug and Mary will argue that these requirements also violate the Commerce Clause of the U.S. Constitution, because the Constitution prohibits protectionist measures designed by states to prevent out-of-state competition from entering their markets. The Twenty-First Amendment does not immunize states from violating these constitutional provisions simply because they have the power to regulate liquor within their borders.

Total Wine is not a resident of the state. Thus, it is not in a position to argue the Privileges or Immunities claim, which deals solely with discrimination against newly arrived residents.

The Litigation Team

Doug and Mary Ketchum are represented by Institute for Justice Senior Attorney Michael Bindas, and Institute for Justice Attorneys Anya Bidwell and Jeff Redfern.

About the Institute for Justice

The Arlington, Virginia-based Institute for Justice is the nation’s leading legal advocate for economic liberty—the right to earn an honest living in the occupation of one’s choice free from excessive and arbitrary government power. In addition to litigating claims under the Privileges or Immunities Clause, IJ’s liberty arsenal includes the Due Process Clause and the Equal Protection Clause of the Fourteenth Amendment, as well as the Constitution’s Commerce Clause. In fact, Granholm v. Heald, the main legal authority on the Commerce Clause issue in the context of the Twenty-First Amendment, was the companion case to the Institute for Justice’s interstate-wine-shipping case, Swedenburg v. Kelly, which IJ argued before the High Court. In Swedenburg, IJ successfully represented Virginia and California family wineries that were banned from shipping wine directly to consumers in New York. The U.S. Supreme Court declared the laws unconstitutional.

For more information or to arrange interviews, please contact Institute for Justice Vice President for Communications John E. Kramer at (703) 682-9320 ext. 205 or at jkramer@ij.org.