By Daniel Shortt, Attorney at Harris Bricken
On June 26, 2019 the Supreme Court of the United States (SCOTUS) issued a ruling in Tennessee Wine and Spirits Retailers Association v. Thomas invalidating a two-year residency requirement for Tennessee retail liquor stores. The Washington State Liquor and Cannabis Board (LCB) has a similar six-month durational-residency requirement required for any person applying to be a true party of interest (TPOI) in a marijuana business. The Thomas decision could mean that days are numbered for Washington’s durational residency requirement.
Tennessee requires alcoholic beverages distributed in the state to pass through a three-tiered system overseen by the Tennessee Alcoholic Beverage Commission (TABC). TABC issues licenses to producers, wholesalers, and retailers of alcoholic beverages. Producers may sell only to wholesalers, wholesalers only to retailers, and retailers may sell to consumers. In order to hold a retailer license, an individual must show that he or she has been a resident of Tennessee for the last two years. SCOTUS noted that this requirement is very restrictive, especially when it is applied to corporations:
The rule for corporations is also extraordinarily restrictive. A corporation cannot get a retail license unless all of its officers, directors, and owners of capital stock satisfy the durational-residency requirements applicable to individuals. In practice, this means that no corporation whose stock is publicly traded may operate a liquor store in the State.
In 2012, the Tennessee attorney general issued an opinion stating that the durational residency requirement violated the Commerce Clause of the constitution and TABC stopped enforcing the requirements against new applicants. After TABC recommended approval of several applicants who did not meet the residency requirement, Tennessee Wine and Spirits Retailers Association (Association), a trade association of in-state liquor stores, threatened to sue. In turn, TABC’s executive director filed a declaratory judgment in state court to settle the question of the residency requirements’ constitutionality. The case was removed to federal court and the requirements were deemed unconstitutional. The Association appealed and the Court of Appeals for the Sixth Circuit affirmed the decision. The Association appealed the decision on the constitutionality of the 2-year residency requirement.
The Court’s analysis focused on whether or not Tennessee’s law was “saved” by Section 2 of the 21st Amendment. The 21st Amendment ended alcohol prohibition and Section 2 gives each State leeway in regulating alcohol in light of public health and safety measures. The Court determined that Section 2 did not save Tennessee’s durational-residency requirement stating that Section 2 “is not a license to impose all manner of protectionist restrictions on commerce in alcoholic beverages. Because Tennessee’s 2-year residency requirement for retail license applicants blatantly favors the State’s residents and has little relationship to public health and safety, it is unconstitutional.”
However, the Court also determined that the residency requirement violated the Commerce Clause of the Constitution. The Commerce Clause provides that “Congress shall have Power. . . to regulate Commerce with foreign Nations, and among the several States[.]” SCOTUS has interpreted a “dormant Commerce Clause” (DCC) which implies that the Commerce Clause does not allow states to implement protectionist measures that inhibit trade among states. We have been writing about this in the context of cannabis residency restrictions for a long time.
Under the DCC, “if a state law discriminates against out-of-state goods or nonresident economic actors, the law can be sustained only on a showing that it is narrowly tailored to advance a legitimate local purpose.” SCOTUS determined that “Tennessee’s 2-year durational-residency requirement plainly favors Tennesseans over nonresidents, and neither the Association nor the dissent below defends that requirement under the standard that would be triggered if the requirement applied to a person wishing to operate a retail store that sells a commodity other than alcohol.”
Under this analysis, Washington’s residency requirement appears out-of-line with the DCC and, by extension, unconstitutional. Like Tennessee’s regulation of liquor, Washington uses a three-tiered system to regulate marijuana sales, licensing producers, processors, and retailers. All TPOIs in all license types must meet Washington’s six-month residency requirement. This restriction significantly impacts corporations, even more so than Tennessee’s requirements because it is imposed on all shareholders and their spouses. That means that a person holding less than 1% of an ownership interest and her spouse must qualify as Washington residents.
Marijuana is a unique commodity given that it remains illegal under federal law. It is also illegal under Washington law to import marijuana from any other state. All Washington marijuana must be grown in-state. However, Washington’s 6-month is a clear protectionist measure favoring Washington owners. It would be hard for Washington to argue that this is the narrowest way for Washington to undertake the legitimate interest of regulating marijuana, given that many other legal states have either never imposed such residency requirements or have removed them or loosened those requirements. Utah was the latest state to do so with its medical marijuana regulations, as reported by the Salt Lake Tribune.
Though, the Thomas decision is arguably distinguishable from the current residency situation in Washington marijuana, it certainly does not help the state’s case if the requirement is challenged. Washington’s residency requirement is strict and controversial. As marijuana legalization spreads across the country it seems like the residency requirement is not sustainable, long term. It remains to be seen whether the Thomas decision is the last straw.