[00:00:00] Speaker 07: We will now hear argument in the case of Day et al vs. Henry et al. [00:00:42] Speaker 03: Stanford, I believe. [00:00:45] Speaker 04: Yes, Your Honor, thank you. [00:00:46] Speaker 04: May it please the Court? [00:00:48] Speaker 04: I'd like to reserve three minutes for rebuttal. [00:00:51] Speaker 03: Keep your eye on the clock. [00:00:52] Speaker 04: Thank you. [00:00:55] Speaker 04: The sale of alcohol has a complicated history in this country, and in this case it's subject to two separate constitutional provisions. [00:01:02] Speaker 04: Like any product, it's subject to the Commerce Clause, which guarantees free interstate commerce. [00:01:07] Speaker 04: but it's also a unique product, which is subject to the 21st Amendment that gives states quite broad regulatory power. [00:01:15] Speaker 04: In this case, those two conflict because Arizona has set up a system that discriminates against out-of-state retailers. [00:01:23] Speaker 04: The Supreme Court has struck the balance between those two, which says that the 21st Amendment, the regulation of alcohol, is subject to [00:01:37] Speaker 04: one part of the Commerce Clause, the non-discrimination principle. [00:01:41] Speaker 07: That is... Counsel, let me ask you this. [00:01:43] Speaker 07: If I understand the record correctly, your firm has been involved in virtually copycat litigation all over the country about these very issues. [00:01:53] Speaker 07: Is that correct? [00:01:54] Speaker 04: I believe we're the only firm that's stupid enough to do these cases. [00:01:56] Speaker 07: Okay, so you're the experts in the area. [00:01:59] Speaker 07: You're here today, you want to get something that you feel you're going to get some traction in. [00:02:04] Speaker 07: As you know, the district court [00:02:06] Speaker 07: Kind of waffled on the standing issue. [00:02:09] Speaker 07: Yes, it did. [00:02:10] Speaker 07: Decided to, if you will, decide the merits. [00:02:14] Speaker 07: Wasn't sure about standing. [00:02:16] Speaker 07: What's your best argument that, because of the redressability issue, that there is standing in this case? [00:02:24] Speaker 04: Well, it starts from the premise of the Ninth Circuit, the previous case by the Circuit in Tucson versus City of Seattle, which said that the standard for redressability is fairly [00:02:36] Speaker 04: moderate and it's a question of likelihood not absolute certainty. [00:02:43] Speaker 04: If the defendant enjoined the state from denying licenses and denying shipping privileges to out-of-state retailers and enjoined the provision that says any wine, unlimited one, any wine coming across the border must be consigned to a wholesaler, then [00:03:03] Speaker 04: The record clearly shows that consumers will then do internet purchases, and the record shows that there are 50 to 200 out-of-state retailers who have signed up for direct shipping privileges in those states that allow it. [00:03:22] Speaker 04: So it is likely that wine retailers who are moving into the online interstate business [00:03:31] Speaker 04: Uh, it's in their own economic interest to sell into, to sell to people. [00:03:36] Speaker 07: Council, what, why is the standing issue in this case different than the one in Orion versus Apple Smith? [00:03:44] Speaker 04: Well, Orion was a case involving a, uh, a peculiar provision of California law. [00:03:52] Speaker 04: Obviously this doesn't involve California law. [00:03:55] Speaker 04: And it was one like this court's previous decision in Black Star Farms. [00:04:00] Speaker 04: where ultimately the court found that the law was not discriminatory. [00:04:05] Speaker 04: It was burdensome, it was complicated, but it was not discriminatory. [00:04:11] Speaker 04: In this case, it is clear that the law is discriminatory. [00:04:16] Speaker 04: The state admitted it in its admissions that an in-state retailer can get a license and sell online and make home deliveries [00:04:28] Speaker 04: There's no way that an out-of-state retailer can do that. [00:04:33] Speaker 07: Correct me if I'm wrong. [00:04:34] Speaker 07: I thought there were like four other circuits that have found that substantially similar three-tier arrangements were not discriminatory. [00:04:46] Speaker 07: Am I incorrect on that? [00:04:48] Speaker 04: There have been a total of five cases, three of them. [00:04:55] Speaker 04: The initial case that influenced a lot of people was a Sixth Circuit case, Labomov v. Whitmer. [00:05:02] Speaker 04: Now, the Sixth Circuit has since decided another case, Block v. Kanepa, which kind of confines that case to its facts. [00:05:11] Speaker 04: It was because the concurring opinion in the original Labomov case had said, we don't really agree with Judge Suttner on [00:05:23] Speaker 04: on the law of this, but we agree in this case that the record, the factual record, justifies what Michigan was doing because Michigan had a peculiar history of constantly limiting and limiting and limiting alcohol sales and online sales. [00:05:40] Speaker 04: They had had the ability to do online, they repealed it for everyone. [00:05:45] Speaker 04: So it was a factual case. [00:05:48] Speaker 04: Then there's the First Circuit case and Bar-V Dwyer that again remand [00:05:53] Speaker 04: reversed the district court who had followed these first couple of cases and said, no, this has to go back to some kind of balancing fact analysis. [00:06:07] Speaker 04: It's perfectly clear from Tennessee Wine and from Granholm that the court must look critically at whether the state has shown that this poses a unique alcohol-related threat of some kind. [00:06:22] Speaker 04: that is different than the same activity in the same product being sold by an in-state one, and then also whether or not non-discriminatory alternatives, Granholm thought a permit system was the right one, Tennessee Wine looked at some others, whether or not a non-discriminatory alternative would be possible. [00:06:48] Speaker 07: Do you think Tennessee Wine is your hook on discrimination? [00:06:52] Speaker 04: No, I think it's Granholm, because Granholm was the one that involved interstate commerce. [00:06:59] Speaker 04: Tennessee Wine involved qualifications for an in-state residency license. [00:07:04] Speaker 04: And to some extent, when they talk about the ease of regulation and things like that, they're referring to the difference between those two. [00:07:17] Speaker 04: Tennessee Wine cited Granholm 38 times. [00:07:21] Speaker 07: Well, let me ask you this. [00:07:22] Speaker 07: I understand the Supreme Court to have said that the three-tier approach in most states is, I forget the exact language. [00:07:32] Speaker 04: Unquestionably legitimate. [00:07:35] Speaker 07: Presumptively legal. [00:07:37] Speaker 07: Clearly, Arizona has such a standard. [00:07:40] Speaker 07: What is it about Arizona's three-tier approach that gets it out of the, if you will, the penumbra of Supreme Court blessing [00:07:51] Speaker 07: that it's presumptively legal. [00:07:54] Speaker 04: Well, first of all, Tennessee Wine addressed that particularly and said that the dictum that has been floating through the previous Supreme Court cases about unquestionable legitimacy does not shield discriminatory laws. [00:08:09] Speaker 07: Okay, but that's just kind of a, you know, it's, you're taking the same thing and looking at it a different way, but what, what [00:08:17] Speaker 07: that the Supreme Court looked at that said is essentially presumptively legal is different than what's happening in Arizona. [00:08:25] Speaker 04: There's a difference between a three-tier system, which is everybody gets a license, a producer, a retailer, and a discriminatory three-tier system where only in-state people can do that. [00:08:39] Speaker 04: What Tennessee Warren said at Granholm is there's nothing wrong with a three-tier system. [00:08:46] Speaker 04: And Arizona mostly has one, though it has exceptions for wineries. [00:08:52] Speaker 04: And we're talking about wine. [00:08:54] Speaker 04: So it's complicated in the winery, in wine cases, because some wines produced both in state and out of state, and that goes back to Black Star Farms, can in fact be sold directly to consumers without going through the system. [00:09:09] Speaker 04: But if you want to be a retailer in Arizona, you must have a retail license [00:09:15] Speaker 04: get your wine from wholesalers and sell to consumers. [00:09:18] Speaker 07: How does the state, as you well know as an expert, alcohol is maybe not so much anymore. [00:09:25] Speaker 07: For a long time, it was a unique substance. [00:09:29] Speaker 07: We had two constitutional amendments dealing with it, but the 21st Amendment basically said, hey, states, you take over. [00:09:36] Speaker 07: We're going to let you do this. [00:09:39] Speaker 07: We've got marijuana now and a few other things that have changed it in terms of its [00:09:44] Speaker 07: totality, but it still is considered a drug, if you will, that has serious adverse consequences for drivers, for health, for all kinds of other things. [00:09:57] Speaker 07: So I don't think you're disputing the fact that the state has a strong interest in regulating the purchase and use of alcohol, right? [00:10:04] Speaker 04: Absolutely. [00:10:05] Speaker 04: I'm not questioning that. [00:10:06] Speaker 07: So given that fact, given the state's strong interest, how does the state run afoul of [00:10:13] Speaker 07: the discrimination concept that you're referring to by having the three-tier approach? [00:10:20] Speaker 04: It doesn't as long as it lets out-of-state entities participate in that three-tier system. [00:10:25] Speaker 01: But can't they? [00:10:26] Speaker 01: I mean, I think the state's brief included examples of out-of-state companies that are licensed in Arizona, including big ones like BevMo and Total Wine and Walmart and places like that. [00:10:40] Speaker 01: These are not [00:10:41] Speaker 01: Arizona companies, but they have a storefront and a license and they receive wine through Arizona wholesalers. [00:10:49] Speaker 01: So doesn't that establish that out-of-state retailers can get a license in Arizona? [00:10:55] Speaker 04: Out-of-state retailers, anybody, an out-of-state person can become an in-state retailer. [00:11:03] Speaker 01: Sure. [00:11:04] Speaker 01: So you're equating having a license in Arizona as becoming an Arizona residence or an in-state person? [00:11:12] Speaker 04: You mentioned opening a storefront. [00:11:14] Speaker 04: That means you create an Arizona business. [00:11:17] Speaker 04: Granholm specifically addressed that. [00:11:20] Speaker 04: And it said that long history of cases in the Supreme Court said a state cannot require an out-of-state firm to become a resident in order to compete on equal terms. [00:11:31] Speaker 04: That was exactly the... Sorry. [00:11:33] Speaker 01: Well, the Arizona scheme requires licensure for both in-state retailers and out-of-state retailers. [00:11:40] Speaker 01: They both have to do it, right? [00:11:41] Speaker 04: No, it will not give a license to an out-of-state retailer. [00:11:44] Speaker 04: It will only give them a license if they open [00:11:47] Speaker 04: It will give them a license to work in a second business. [00:11:49] Speaker 01: I think we're talking about the same thing. [00:11:51] Speaker 01: There are licensure requirements, which I think are legitimate, unless you can point me to some case law that says that the state can't do that. [00:11:58] Speaker 01: And they apply equally to in-state retailers and companies that are out of state, like Walmart, who then can do what is required to get a license in Arizona. [00:12:08] Speaker 01: But Walmart hasn't moved their headquarters to Arizona. [00:12:10] Speaker 01: They haven't become an Arizona company. [00:12:13] Speaker 04: But they're not selling wine from the Walmart [00:12:16] Speaker 04: in California. [00:12:18] Speaker 04: In other words, interstate commerce is two separate questions. [00:12:23] Speaker 04: One is products moving in interstate commerce, and the other, and that's Granholm, and the other is people, licensees in interstate commerce, that's Tennessee Line, and the court has consistently said those are two different things. [00:12:38] Speaker 01: Correct me if I'm wrong, but I thought Tennessee Wine had a temporal requirement. [00:12:44] Speaker 01: You had to be present in the state for two years before you could get a license. [00:12:49] Speaker 01: So that was what was problematic. [00:12:52] Speaker 04: It was a complicated set of, they had all these alcohol, the devil's in the details of the weeds, they're complicated statutes. [00:13:00] Speaker 04: Tennessee Wine, Tennessee had a series of three different residency requirements. [00:13:07] Speaker 04: The one that was at the core of Tennessee Wine was the two-year residency requirement prior to applying for a license. [00:13:16] Speaker 01: Which does not apply in Arizona. [00:13:18] Speaker 01: Arizona doesn't have that requirement, correct? [00:13:20] Speaker 03: I do not know. [00:13:21] Speaker 03: I don't believe so. [00:13:23] Speaker 03: Do you want to save your time? [00:13:25] Speaker 03: It's up to you entirely. [00:13:27] Speaker 03: I would prefer to save the remaining of my time. [00:13:29] Speaker 03: Very well. [00:13:30] Speaker 03: And we'll have other questions for you when you come back. [00:13:34] Speaker 07: Now, as I understand it, we have two different counsel here. [00:13:37] Speaker 07: Ms. [00:13:38] Speaker 07: Davis for 13 minutes, is that right? [00:13:41] Speaker 07: And then Ms. [00:13:43] Speaker 07: Porter, is that correct, for two minutes? [00:13:45] Speaker 07: Okay, you each have your very own clock. [00:13:48] Speaker 07: Please proceed. [00:13:50] Speaker 02: Good morning. [00:13:51] Speaker 02: May it please the court, my name is Lucy Davis and I represent the state defendants. [00:13:55] Speaker 02: I'll start with Judge Smith, your question about standing. [00:13:58] Speaker 02: And just to be clear, the only way that plaintiffs can get relief here is either for the three-tiered system to be struck down. [00:14:05] Speaker 07: Can you talk up a little bit, please? [00:14:06] Speaker 02: Yes, of course. [00:14:06] Speaker 02: Apologies. [00:14:07] Speaker 02: The only way for the plaintiffs to get relief here is either for the three-tiered system to be struck down. [00:14:12] Speaker 02: That's what would allow them to be able to purchase from retailers outside the state that are unlicensed or for the legislature to make a different policy determination and create this permit that they are seeking. [00:14:22] Speaker 02: And so as to standing, [00:14:25] Speaker 02: you know, as to the former way that they would get relief, that's not what they've asked for. [00:14:28] Speaker 02: In their reply brief at 10 and 12 to 13, they say that they are expressly not challenging the licensed wholesaler requirement, requiring any retailer selling to Arizonans to purchase from a licensed wholesaler. [00:14:40] Speaker 02: So that's it. [00:14:40] Speaker 07: What is the, what is your response regarding wineries and direct sales by wineries? [00:14:48] Speaker 07: That, of course, is a little different than the normal three-tier approach. [00:14:54] Speaker 07: We don't worry about that because of de minimis non curat lex or some other principle, or why do we ignore that? [00:15:02] Speaker 02: A few important differences there, Your Honor. [00:15:05] Speaker 02: As a legal matter, this court in Black Star Farms found no discrimination among in-state, out-of-state wineries when analyzing that exception within the producer tier. [00:15:15] Speaker 02: And so it makes little sense to then use one tier to compare to the other for purposes of Doorman Commerce Clause. [00:15:21] Speaker 02: They're not similarly situated. [00:15:23] Speaker 02: I take your question to be getting more to the practical realities. [00:15:26] Speaker 02: So there's three important differences. [00:15:28] Speaker 02: And we talk about this a little bit at pages 58 to 59 of our answering brief. [00:15:32] Speaker 02: So first, wineries are regulated by the federal government, and they can lose their federal permits if they violate state law. [00:15:39] Speaker 02: So automatically, we have a different incentive and oversight structure there. [00:15:43] Speaker 02: Second, wineries have a different relationship to the product when they're skipping the wholesaler tier and selling directly to consumers. [00:15:51] Speaker 02: It's a product they've produced, have a knowledge about the product, very little chance of selling counterfeit, and they have business and reputational reasons to further incentivize selling quality product and shipping it with integrity. [00:16:04] Speaker 02: So health and safety calculus is different there. [00:16:06] Speaker 02: And then third, there's just a fundamentally different effect on the three-tiered system when we're talking about direct shipment with wineries versus what plaintiffs want to be possible. [00:16:18] Speaker 02: And what they want to be possible [00:16:20] Speaker 02: destroys the three-tiered system, in effect. [00:16:22] Speaker 02: With wineries, it doesn't. [00:16:24] Speaker 02: So we think, I know your honors are very familiar with the three-tiered system, but at a high level, it creates this closed circuit between the producer and the consumer, excuse me. [00:16:33] Speaker 02: And you picture a chute from the wineries to the consumers. [00:16:38] Speaker 02: That's the exception, but it doesn't destroy the system because there's still, from the state's perspective, absolute traceability between producer and consumer. [00:16:47] Speaker 02: And for some of the reasons that we've talked about why wineries are different, the legislature can shift some of those other responsibilities from the wholesaler tier to the wineries, such as taxation. [00:16:58] Speaker 02: And again, calculus is different from the health and safety. [00:17:01] Speaker 07: Let me ask you this. [00:17:02] Speaker 07: You mentioned that the federal government regulates the wineries. [00:17:06] Speaker 07: Does the state receive reports from the federal government or any kind of information that would help them, if you will, [00:17:16] Speaker 07: monitor what the wineries are doing in terms of sales? [00:17:21] Speaker 02: Does the state request records from the federal government? [00:17:23] Speaker 07: Yeah. [00:17:24] Speaker 02: Your Honor, that's a good question. [00:17:26] Speaker 02: My understanding is there's some communication. [00:17:29] Speaker 02: There might be reporting in both directions if there is some identification of an issue. [00:17:34] Speaker 02: I'm not, frankly, totally sure about the answer to that. [00:17:39] Speaker 02: I know that this isn't totally on the record, but when the state identifies wineries that might be shipping in illegally that aren't licensed, [00:17:46] Speaker 02: there's an education effort between the state and the wineries. [00:17:49] Speaker 02: So there might be something similar between the wineries and the federal. [00:17:53] Speaker 07: And winery shipments are regulated by? [00:17:55] Speaker 02: The shipments themselves? [00:17:58] Speaker 07: Yes. [00:17:59] Speaker 02: Well those would be subject to state law to the extent they're shipping into Arizona. [00:18:03] Speaker 07: Okay. [00:18:04] Speaker 07: So in effect the state does monitor these a little differently than the others, but it does monitor them in terms of shipment. [00:18:13] Speaker 07: They have to comply with state law. [00:18:15] Speaker 02: Correct. [00:18:16] Speaker 02: And as the record indicates in Investigator Williams's affidavit, the state does conduct stings and such to check that, you know, age verification laws are being abided by and things like that. [00:18:30] Speaker 02: You know, when we're dealing with a winery, again, there's just a heavy incentive for them to want to comply with state law. [00:18:35] Speaker 02: If you don't have a retailer present here, there's very little the state can do to even know, you know, when they're going to ship, from where they're shipping, what they're shipping. [00:18:44] Speaker 02: and the ability to enforce and track is just completely different. [00:18:49] Speaker 07: So if there's a winery in Napa Valley and someone from Arizona goes there and wine tasting and they order four cases of whatever and have it shipped directly, what monitoring, what reporting, if any, does the state of Arizona get with respect to the shipment of wine by that Napa winery to [00:19:14] Speaker 07: the Arizona resident? [00:19:18] Speaker 02: If the Arizona resident purchased while they were there and the winery is shipping in, I think there might be reporting requirements for the wineries to give to the state, but they would certainly proffer those records if the state asked. [00:19:32] Speaker 02: I'm not totally sure about if they're just Sue Espontes. [00:19:35] Speaker 07: Does the state ask for those? [00:19:36] Speaker 07: I mean, is it, or is this, if they offered them it's just coincidental? [00:19:42] Speaker 02: I mean, the state will ask for records if there's a complaint, you know, about age verification not being checked or things like that. [00:19:49] Speaker 02: The department is not, you know, super-resourced, but between the last several years, there's anywhere from 16 to 21 officers, so they're not, you know, able to cover the waterfront in terms of all shipments. [00:20:00] Speaker 07: So Mr. Tanford would say, well, what's the difference between that and someone in Ohio, not a winery, but a seller of spirits, [00:20:10] Speaker 07: wants to sell directly to somebody in Arizona. [00:20:13] Speaker 07: Not too much, just a little bit. [00:20:15] Speaker 07: What's the difference? [00:20:17] Speaker 02: Sure. [00:20:18] Speaker 02: So again, I have a legal answer and a practical answer. [00:20:21] Speaker 05: OK. [00:20:21] Speaker 02: And I really do want to start with the legal, because I think Your Honor's question, specifically Judge Beatty asking about what's the difference, that's really what this case is about. [00:20:28] Speaker 02: It's a physical presence case. [00:20:30] Speaker 02: It's not a direct shipment case. [00:20:32] Speaker 02: I think some of the confusion arises from the briefs and the case law in that court's use. [00:20:37] Speaker 02: direct shipment to describe three very different contexts, and plaintiff's case requires sort of apples to oranges comparing two concepts that are not similarly situated. [00:20:48] Speaker 02: As a practical matter, and this is what the record reflects, both the Williams affidavit, Curtin affidavit, when, and I would sum up the differences when a retailer is here versus not, in terms of incentives to comply and the ability for the state to monitor them, and then the state's ability to take enforcement action when they don't comply. [00:21:07] Speaker 02: So if you have a retailer here, they're within the state borders, subject to criminal enforcement, monetary fines, and they've necessarily invested time and energy to open the storefront and get licensed here. [00:21:20] Speaker 02: So the threat of losing their license is actually strong medicine for them. [00:21:24] Speaker 02: And when they are here, the state also gets the full benefit of [00:21:29] Speaker 02: you know, partnership with wholesalers and local law enforcement to monitor and take actions if necessary. [00:21:35] Speaker 06: Couldn't you accomplish much of that by just requiring out-of-state retailers to get an Arizona license and submit to various regulatory requirements? [00:21:44] Speaker 02: Along the lines of what plaintiffs are seeking, I take your question to be asking. [00:21:49] Speaker 06: I mean, you're saying that there's an interest for the state to be able to sort of watch what retailers are doing and how they're conducting their business and taxes. [00:21:55] Speaker 06: I get all that. [00:21:56] Speaker 06: That seems totally reasonable. [00:21:58] Speaker 06: I understand that. [00:21:59] Speaker 06: What I don't understand is why the only way you can accomplish that is if the retailer has a physical presence in Arizona. [00:22:06] Speaker 02: So to be sure, Arizona legislature, like other states, could pick a different way to do this, right, and create that permit. [00:22:13] Speaker 02: I think it's important to recognize that wouldn't be the three-tiered system anymore. [00:22:17] Speaker 02: Why is that? [00:22:18] Speaker 06: I don't understand that because the Supreme Court, in talking about the three-tiered system, says that system is basically separating the ownership interests between suppliers, wholesalers, and retailers. [00:22:29] Speaker 06: It doesn't mean, I don't understand the Supreme Court to be saying that the three tier system has to be like, all of that based in one location. [00:22:37] Speaker 06: You could, Arizona could say, retailers, you have to buy from a licensed wholesaler, whether that's an Arizona licensed wholesaler or not, you have to buy from a licensed wholesaler, and you'd still have the three tiers. [00:22:51] Speaker 02: This is a really important point, so thank you, Your Honor. [00:22:53] Speaker 02: It's important to remember that under the 21st Amendment, each state is its own market. [00:22:57] Speaker 02: So we can't think about the three tiered system as being [00:22:59] Speaker 02: stretched out over the whole country where a licensed wholesaler in one state is equivalent to a licensed wholesaler in another state. [00:23:06] Speaker 02: Each state is entitled to decide what laws they want alcohol to be subject to as it flows through the system. [00:23:13] Speaker 02: And the reason why the presence of retailers and wholesalers is really the meat of the three-tiered system is because that's the only way that a state can funnel all alcohol sales into the state through a defined channel that it can [00:23:26] Speaker 02: trace, like I was talking about earlier, and make sure that all of that alcohol has been subject to the state's taxation and health and safety checks along the way. [00:23:35] Speaker 02: So, you know, if a retailer isn't here, you now can picture our closed circuit, right? [00:23:40] Speaker 02: What they want to be possible sort of cuts a gash in the end of that circuit and allows these new channels of alcohol from other states. [00:23:47] Speaker 02: And again, totally valid policy determination if a state weighs the risks and interests differently. [00:23:53] Speaker 02: But it's not a three-tiered system anymore in the way the Supreme Court has approved it because, again, we don't have that defined funnel anymore. [00:24:00] Speaker 02: And does that make sense? [00:24:04] Speaker 02: Not quite, but the words make sense. [00:24:08] Speaker 06: I'm not sure that it makes sense logically in terms of how I'm reading the Supreme Court cases. [00:24:13] Speaker 02: Well, and I think the Supreme Court has recognized, I mean, maybe there's different ways to conceive of what a three-tiered system is. [00:24:19] Speaker 02: And if you think about it as just being about [00:24:21] Speaker 02: separation of tiers, then I take your point. [00:24:23] Speaker 06: But the way the Supreme Court has defined and approved of the three-tiered system is not just about separation, it's specifically approved of... So what do you make of when it talks about the three-tiered system and it goes through that whole history of like we saw that tide houses were a bad idea and so then we came up with this new structure to solve that problem. [00:24:41] Speaker 06: And it seems to me that while that structure solved that problem, we're now arguing that this structure solves a whole bunch of other problems and those problems lead into [00:24:49] Speaker 06: the control of interstate commerce, which is not what, at least the history that the Supreme Court was talking about, was the origin of the three-tiered system. [00:24:58] Speaker 02: I actually think that the way the Supreme Court has talked about it in North Dakota, Granholm, and then Tennessee wine is consistent with the history leading up to the 21st Amendment, because as you know, the problem before the Wilson Act and even leading up to the Web Kenyan Act was that the states effectively had lesser power to regulate [00:25:15] Speaker 02: alcohol coming into their borders than alcohol that was originating within their borders. [00:25:19] Speaker 02: And Tennessee Wine talks about how this created this favored status for out-of-state alcohol. [00:25:24] Speaker 02: And so that's consistent with this idea that the three-tiered system is meant to give the state equal power with respect to both of those things. [00:25:31] Speaker 02: And that's only possible if the state can set the same terms for how alcohol is going to cross into its borders as alcohol that's originating there. [00:25:42] Speaker 02: I take your point with any other article of commerce and Mr. Tamford's point that when we think about interstate commerce, we're literally thinking about, you know, goods moving across state lines. [00:25:51] Speaker 02: But with alcohol and the 21st Amendment saying, you know, importation, the state has the ability to regulate that. [00:25:58] Speaker 02: We can't think about it in the same way, and the state does have unique power to regulate the terms of, like, literal importation differently than other goods. [00:26:09] Speaker 07: Does it make any difference that we live in a modern age when computers and so on can help keep track of things? [00:26:16] Speaker 07: I'm a Californian. [00:26:17] Speaker 07: They're very, very good at deriving taxation and taxes from people all over the country. [00:26:25] Speaker 07: No problem at all. [00:26:27] Speaker 07: Arizona wants to tax alcohol if, as my colleague suggested, there were a license requirement of someone out of state [00:26:37] Speaker 07: albeit not having a physical location here with computers and all that sort of thing, couldn't the state of Arizona simply get the same tax benefits, be able to pursue things as well as here? [00:26:52] Speaker 07: In other words, since we're dealing with dormant commerce clause kind of issues, why doesn't that make sense? [00:26:58] Speaker 02: Your Honor, I've run through my time. [00:26:59] Speaker 02: I want to be able to answer your question fulsomely. [00:27:01] Speaker 02: Thank you. [00:27:02] Speaker 02: So a few thoughts there. [00:27:04] Speaker 02: Of course, the legislature could make a different determination and say, we care less about some of the interests the current scheme serves. [00:27:12] Speaker 02: We want to open up the market. [00:27:14] Speaker 02: We'll enact a scheme to collect those taxes. [00:27:17] Speaker 02: That's not the current system, of course. [00:27:19] Speaker 02: And I think plaintiffs cite South Dakota v. Wayfair in their briefs. [00:27:23] Speaker 02: And I think that case is sort of instructive in a different way, which is there the Supreme Court gave a lot of weight to how state legislatures had decided [00:27:31] Speaker 02: the most efficient and effective way to collect taxes. [00:27:34] Speaker 02: And more than 30 states have made the same determination that Arizona has in terms of its three-tiered system. [00:27:40] Speaker 02: And I think that's owed some deference. [00:27:43] Speaker 02: And we've spent a lot of time talking about, can I finish with one brief point, Your Honor? [00:27:48] Speaker 02: Please do. [00:27:48] Speaker 02: I just, we've talked a lot about sort of the analysis under prong two, and I understand that, you know, that's part of our burden if the analysis ever gets there. [00:27:56] Speaker 02: But I think it's really important to not miss step one, and that, you know, Arizona doesn't have to justify the reasons for its laws if it's not discriminatory. [00:28:05] Speaker 02: And we have facially even-handed laws here, and the record supports that there's no discrimination in effect. [00:28:12] Speaker 02: And I would point the court to ER 56 and SER 15 showing that, you know, it's actually, [00:28:17] Speaker 02: What plain to say, quote, out of state retailers that, quote, dominate the local Arizona retail market. [00:28:23] Speaker 06: So Judge Smith is giving me permission to ask one more question. [00:28:29] Speaker 06: So you're right. [00:28:30] Speaker 06: Let's assume that we're at question two of the test. [00:28:33] Speaker 06: We've determined it's discriminatory. [00:28:35] Speaker 06: Now we're trying to wrestle with justification. [00:28:38] Speaker 06: And I'm still struggling with this point that we've been talking about, so I'm going to ask it one other way. [00:28:45] Speaker 06: If Arizona had a rule that said that as a retailer you can only sell things that you acquired from a licensed wholesaler, but they didn't then further specify it has to be an Arizona licensed wholesaler, just a licensed wholesaler from somewhere. [00:29:00] Speaker 06: So clearly if a product would be coming from a state where they don't license wholesalers, they don't have the three tier system, then that's out, right? [00:29:07] Speaker 06: So Arizona says you must as a retailer acquire your product from a licensed wholesaler wherever that is. [00:29:15] Speaker 06: Tell me what the state's interest, tell me what Arizona is losing by that system versus what they have, which says that the licensed wholesaler has to be Arizona licensed. [00:29:26] Speaker 02: So a few things, Your Honor. [00:29:27] Speaker 02: It's losing the ability to regulate the wholesaler tier in a unique or more restrictive way than other states might. [00:29:33] Speaker 02: An intervener defendants brief talks about how Arizona has some more restrictive laws at that tier. [00:29:38] Speaker 02: And that matters, right, because that's affecting the alcohol that's then sold to [00:29:43] Speaker 02: residents so that can affect price, it can affect health and safety of the product. [00:29:47] Speaker 06: So what's the health and safety interest? [00:29:48] Speaker 06: I guess I'm asking you to get really granular in a sense of like, yes, you're losing a regulatory point, but to what end? [00:29:56] Speaker 06: Like what are you not going to be able to do in terms of health and safety by not having that regulatory point and some other jurisdiction having it? [00:30:05] Speaker 02: When alcohol flows through our system and stops at the wholesaler tier in state, [00:30:10] Speaker 02: Wholesalers have the ability to inspect it, and often that happens when they're unpacking it for shipment. [00:30:15] Speaker 02: So looking at corks, sometimes product can be damaged or degrading in the process. [00:30:20] Speaker 02: And so our wholesalers in state at that tier can check for that. [00:30:26] Speaker 02: They also play an important role because they can track all product sold in Arizona for identifying recalled product or things that need to be pulled back. [00:30:35] Speaker 02: You lose, again, that partnership and the ability to do that with [00:30:38] Speaker 02: a retailer located out of state that's not purchasing from a wholesaler that Arizona can regulate and work with to do that. [00:30:47] Speaker 02: Again, you have this effect on price when if wholesalers in other states aren't being regulated as strictly as Arizona's wholesalers are, and so that's related to temperance and things like that. [00:31:00] Speaker 02: And then the enforcement piece of it, that even if you could get a retailer to buy from a licensed wholesaler somewhere, [00:31:08] Speaker 02: that's operating in a different regulatory market, the state doesn't have the same enforcement power over that retailer located outside of its borders in terms of age verification, reporting, et cetera. [00:31:19] Speaker 06: And is it Arizona's position, I'm sorry, I'm going over your leave. [00:31:23] Speaker 06: Is it Arizona's position that those interests that you've listed, which I think are valid for sure, states have the authority to have those interests and try to serve them? [00:31:32] Speaker 06: Is it Arizona's position that you cannot serve those things that you've just listed out through a licensing scheme applicable to retailers? [00:31:39] Speaker 02: It's the state's position that you cannot achieve those things in the context of a three-tiered system in the same way. [00:31:47] Speaker 02: I think Tennessee Wine supports that, that physical presence of retailers is actually a non-discriminatory, least restrictive way to preserve the three-tiered system and achieve these same interests. [00:31:58] Speaker 02: Could you devise another scheme [00:32:00] Speaker 02: that would allow for different flows of alcohol and different ways to regulate them? [00:32:04] Speaker 02: Yes. [00:32:04] Speaker 02: But we think, you know, as a matter of law, we don't have to do that. [00:32:07] Speaker 02: And the record shows that it would be more difficult for the state to achieve those same things. [00:32:13] Speaker 07: Thank you. [00:32:14] Speaker 07: You have any questions? [00:32:15] Speaker 07: I just have one final question. [00:32:16] Speaker 07: So I gather you're saying to us that even though there may be other ways to do it, that under the 21st Amendment and the Supreme Court [00:32:28] Speaker 07: law that we have, Tennessee Wine and Granholm, that we defer to the legislature. [00:32:33] Speaker 07: They have the right to make a choice that fits in this general scheme. [00:32:40] Speaker 07: We're not supposed to micromanage it and decide what we would do if we were members of the legislature. [00:32:46] Speaker 07: Is that your position? [00:32:48] Speaker 02: Yes, but I'm not even sure I'm urging that broad of a position because the legislature certainly doesn't have the right to come up with [00:32:55] Speaker 02: discriminatory ways to try and advantage Arizona companies or Arizona products. [00:33:00] Speaker 02: I think precedent makes this a fairly easy case. [00:33:03] Speaker 02: And the Supreme Court has said states have the power to require wholesalers to be present, retailers to be present. [00:33:09] Speaker 02: Arizona has no residency requirement, no durational requirement. [00:33:13] Speaker 02: It's just about physical presence, and we just don't think that's an open question for this court. [00:33:18] Speaker 07: Thank you very much. [00:33:18] Speaker 02: Thank you. [00:33:20] Speaker 07: So now we have Ms. [00:33:23] Speaker 07: Porter for two minutes. [00:33:24] Speaker 07: Maybe. [00:33:25] Speaker 07: Yes. [00:33:27] Speaker 00: Good morning, Your Honors. [00:33:28] Speaker 00: Hannah Porter on behalf of the Intervenor Defendant Hawaiian Spirits Wholesaler Association of Arizona. [00:33:34] Speaker 00: May it please the Court? [00:33:35] Speaker 00: I did want to address some of the questions that have just been going on about the wholesaler purchase requirement. [00:33:41] Speaker 00: And I think we can all agree that a necessary part of the three-tier system is to actually have that middle tier, the wholesalers by clients. [00:33:50] Speaker 00: And when we're talking about the three-tier system, I want to [00:33:54] Speaker 00: agree completely with what my colleague was already saying. [00:33:56] Speaker 00: There isn't a national three-tier system. [00:33:59] Speaker 00: Under the 21st Amendment, each state is empowered to create its own three-tier system, or if they didn't want to have a three-tier system, something else, and it can choose how to regulate those interactions between the tiers. [00:34:15] Speaker 00: For example, in Arizona, wholesalers can't provide credit or bonuses to retailers. [00:34:22] Speaker 00: They can't [00:34:23] Speaker 00: sell their product to retailers at or below cost. [00:34:27] Speaker 00: They can't require retailers to purchase a certain amount of product. [00:34:32] Speaker 00: And that's all in Arizona law, but that's not necessarily what another state might choose to do in terms of regulating the interactions between wholesalers and retailers. [00:34:44] Speaker 00: And the way that the state implements those non-discriminatory restrictions is through the in-state wholesaler purchase requirement. [00:34:56] Speaker 07: recollection is that one of the things that motivates state legislatures after the 21st Amendment was to avoid involvement by, I'll use the general term, the mob or illegal elements in this business. [00:35:10] Speaker 07: Is that a factor that was considered? [00:35:11] Speaker 07: Does the legislative history show that that played any role in Arizona's three-tier choice? [00:35:20] Speaker 00: You know, Your Honor, I don't know the specific legislative history in terms of what [00:35:25] Speaker 00: the original creation of the three tier system in Arizona to that specific point. [00:35:31] Speaker 00: But we do know that when Arizona passed the farm winery statute that allowed that limited exception to go outside of the three tier system that they've reaffirmed that it is the legislative intent that were any portion to be found unconstitutional. [00:35:48] Speaker 00: the court should act in a manner to preserve the three-tier system. [00:35:52] Speaker 00: So we know that it's very important to them to preserve the three-tier system. [00:35:57] Speaker 00: And I would say that what the plaintiffs are seeking is truly an exception to the three-tier system. [00:36:03] Speaker 00: They want wine to come and be sold to Arizona customers that has not gone through Arizona's specific three-tier system. [00:36:12] Speaker 07: Do either of my colleagues have questions? [00:36:15] Speaker 07: All right. [00:36:16] Speaker 07: Thank you very much. [00:36:18] Speaker 07: All right, Mr. Chanford, you get the wind up here. [00:36:22] Speaker 04: Thank you, Your Honor. [00:36:24] Speaker 04: A couple of things. [00:36:24] Speaker 04: First of all, the Supreme Court did not say that states could require wholesalers to be present. [00:36:29] Speaker 04: That appears in a parenthetical in the Tennessee Wine Opinion, or Granholm maybe, I've forgotten which one, where they are summarizing one position taken by a single justice in one case. [00:36:41] Speaker 04: They have not said that. [00:36:43] Speaker 07: No, no, no Supreme Court case has rebutted that dicta, right though? [00:36:48] Speaker 07: None have followed it either. [00:36:50] Speaker 04: It has not, it simply has not been relevant because Tennessee Wine goes very carefully through all of this stuff. [00:36:56] Speaker 04: It goes through what the three tier system means and it goes through the history of it and it goes through the reasons that we have it and it comes to the conclusion quite clearly that the three tier system does not mean a discriminatory three tier system. [00:37:15] Speaker 04: They specifically say, in summarizing this dicta from Granholm, that the three-tier system does not sanction discriminatory features. [00:37:29] Speaker 07: Is it fair to say that the gravamen of your complaint is the discrimination prong, right? [00:37:36] Speaker 04: Correct. [00:37:37] Speaker 07: That's it. [00:37:38] Speaker 07: And you feel that the discrimination prong in this case is what? [00:37:43] Speaker 07: You feel that the discrimination [00:37:45] Speaker 07: prong is violated in this circumstance, in what way? [00:37:49] Speaker 04: In requests for admissions, the state admitted that a retailer physically located in Arizona may get a license that allows it to sell online and ship to consumers. [00:38:03] Speaker 04: A retailer physically located outside the state may not get that. [00:38:08] Speaker 04: Now, the actual [00:38:10] Speaker 04: way you get that through the legal, through the laws and regulation is a bit more complicated. [00:38:15] Speaker 04: But that was the simple answer and the state has admitted it. [00:38:21] Speaker 04: And the state got up here and made a lot of assertions about what might deter people, what might be a good idea. [00:38:33] Speaker 04: But again, in Tennessee Wine, they said assertions are not adequate to sustain [00:38:40] Speaker 04: a discriminatory feature of a law. [00:38:42] Speaker 04: There must be concrete evidence that it, I'm sorry, my time has expired. [00:38:49] Speaker 04: Unless there are any questions. [00:38:50] Speaker 07: May I ask my colleagues whether either has this question? [00:38:52] Speaker 07: I think not. [00:38:53] Speaker 07: So thanks to all counsel for your argument in this interesting case. [00:38:57] Speaker 07: We appreciate your help. [00:38:59] Speaker 07: The case just argued is submitted and the court stands adjourned for the day.