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April 22, 2020 - In-state liquor retailers were saved yesterday from being undercut by out-of-state businesses. A federal appeals court, in its strong opinion for the State of Michigan, has upheld the statutory authority of the Michigan Liquor Control Commission (MLCC) to regulate alcohol distribution through its three-tier distribution system that protects the business interests of in-state retailers through fair competition and prioritizes public health and safety.
“This decisive ruling is a significant victory for Michigan retailers, our business community and consumers,” said MLCC Chair Pat Gagliardi, on behalf of all MLCC Commissioners. “We are very pleased with this unanimous decision that continues to ban out-of-state retailers who want to bypass our three-tier distribution system to poach business from Michigan retailers.”
In Lebamoff Enterprises v. Gretchen Whitmer, Dana Nessel, and Pat Gagliardi (No. 18-2199-2200), the U.S. Sixth Circuit Court of Appeals upheld the MLCC’s restriction on out-of-state retailers delivering alcohol directly to Michigan consumers. Reversing the lower court’s opinion that would have extended the delivery rights to retailers nationwide, the Sixth Circuit concluded that the challenged statute permissibly regulates the importation of alcohol and protects the health, safety, and welfare of Michigan citizens. The decision validates Michigan’s regulatory authority to funnel alcohol that enters Michigan through in-state wholesalers and protects in-state retailers from unfair competition from out-of-state retailers not subject to Michigan’s laws.
The suit, filed by a Fort Wayne, Indiana wine retailer and three Michigan wine enthusiasts, asserted that Michigan could not allow its licensed retailers to deliver alcohol to Michigan consumers without also allowing out-of-state retailers to ship directly to Michigan consumers, even though the out-of-state retailers would be bypassing Michigan’s required wholesaler tier of distribution.
The unanimous, 3-0 decision of the Sixth Circuit panel on April 21, 2020, affirmed the validity of Michigan’s retailer-delivery statute and the State’s authority under § 2 of the 21st Amendment and that the law has the predominant effect of protecting public health and safety.
The Court noted that the three-tier system of alcohol distribution has been a key part of state efforts to control the flow of alcohol since the end of Prohibition in 1933. In particular, the Court observed that wholesalers (or in the case of hard liquor, the State itself) play a key role in that three-tier system, and the 21st Amendment allows states to funnel alcohol sales from suppliers through in-state distributors to licensed retailers.
One of the key goals of the three-tier system is to balance the availability of alcohol to consumers against excessively low prices that could overstimulate consumption. By upholding the statute, the Court preserved Michigan’s authority to prevent out-of-state retailers like Lebamoff—unfettered by Michigan’s regulatory requirements—from undercutting Michigan retailer prices and “escap[ing] the State’s interests in limiting consumption.”
The Court also recognized that states may require retailers to be located in the state, and that to ensure regulatory compliance, the MLCC conducted more than 18,000 retailer inspections in 2016 alone. The Court concluded that Michigan had presented sufficient evidence to show that requiring in-state presence serves the public health and that the plaintiffs failed to “sufficiently refute[]” that evidence.
The Court stated that in-state retailers “all live with the bitter and sweet of Michigan’s three-tier system—the bitter of being able to buy only from Michigan wholesalers . . . and the sweet of being subject only to intrastate competition.” By avoiding purchasing alcohol from Michigan wholesalers “Lebamoff seizes the sweet and wants to take a pass on the bitter.” But allowing states to funnel alcohol sales through the wholesaler tier is “precisely what § 2 is for.”
It is the mission of MLCC to make alcoholic beverages available for consumption while protecting the consumer and the general public through regulation of those involved in the importation, sale, consumption, distribution, and delivery of these alcohol beverage products.
