California's restrictions on out-of-state liquor imports are challenged

After persuading a federal judge in August that California's Alcoholic Beverage Control Act discriminates against interstate commerce with different rules for out-of-state and in-state wineries to get their products to consumers, Nelson & Fraenkel LLP filed another lawsuit just after Christmas in the same court on behalf of California liquor consumers.

Two Los Angeles liquor collectors are challenging the legality of the law, saying it unconstitutionally prohibits out-of-state distillers from selling and shipping directly to California buyers.

Under California Business and Professions Code Section 23502, California distillers can obtain a license that allows them to sell and deliver liquor directly to in-state customers. However, according to Section 23661 of the law, out-of-state distillers cannot obtain this license and must ship their products to an authorized California importer.

The complaint, filed Dec. 26 by Nelson & Fraenkel LLP partner Gabriel S. Barenfeld, claims this out-of-state restriction, enforced by Attorney General Rob Bonta and the director of the Department of Alcoholic Beverage Control, violates the commerce clause of the U.S. Constitution. Goldberg et al. v. Bonta et al., 2:24-cv-11121 (C.D. Cal., filed Dec. 26, 2024).

The plaintiff collectors are joined by East Tennessee Distillery LLC, the company they tried to buy from, according to the complaint.

In the case filed a year ago challenging the law, Nelson & Fraenkel represent East Tennessee Distillery and another liquor company that claim the act discriminates against interstate commerce. Dwinell LLC et al. v. McCullough et al., 2:23-cv-10029 (C.D. Cal., filed Nov. 28, 2023).

The state Department of Justice moved to dismiss that lawsuit on arguments the act was not discriminatory because the statute fairly requires all out-of-state wineries - regardless of whether they have a presence in California - to send their products into the state through an importer.

However, in August, U.S. District Judge Stanley Blumenfeld Jr. denied the motion after finding the plaintiffs pled sufficient facts to demonstrate discrimination. "Plaintiffs sufficiently allege that the importer requirements impose significant burdens on interstate commerce, adding to their costs and hindering their ability to compete in the largest market for wine in the United States," Blumenfeld wrote.

"By refusing to allow East Tennessee Distillery to sell, ship and deliver its distilled products upon the same terms as in-state craft distilleries, the State of California is discriminating against interstate commerce and protecting the economic interest of local business by shielding them from competition, in violation of the Commerce Clause of the United States Constitution," the new complaint stated.

Neither Bonta's office nor the state's alcohol control department, nor attorneys from Nelson & Fraenkel responded to emails by press deadline on Monday. A public information officer for the state's alcoholic control department said the office does not comment on pending or ongoing litigation.

According to the new complaint, the collector plaintiffs said they wanted to buy limited exclusive editions from the Tennessee distillery. However, the distillery said it was unable to do business with them because California won't issue the Tennessee company a craft distiller license under the law.

According to the act, the state may issue these licenses to liquor manufacturers that produce less than 150,000 gallons of distilled beverages - excluding brandy - on an annual basis.

The complaint states East Tennessee Distillery meets these requirements but must ship to a California importer at higher costs with extra delivery steps. The collector plaintiffs said they can't afford the additional time and expense to travel to Tennessee and personally transport the beverages to their homes.

"California has no public health or safety reason to totally ban a licensed out-of-state craft distiller from shipping products directly to consumers and any such direct shipping could be safely monitored and regulated through a permit system," so the ban is not justified by the 21st Amendment, the complaint stated.

Other states have challenged the constitutionality of each other's alcohol shipping and distribution laws, most notably in New York and Michigan. A seminal ruling came in 2005 when the U.S. Supreme Court in Granholm v. Heald, 544 U.S. 460 (2005) invalidated restrictions on out-of-state entities' ability to sell alcohol in New York and Michigan after finding the laws violated the commerce clause.

In 2019, the high court in Tennessee Wine and Spirits Retailers Assoc. v. Thomas, 588 U.S. 504 (2019) found a Tennessee provision that imposed a two-year residency requirement for retail liquor licenses was not authorized by the 21st Amendment.

The most recent self-distribution challenges were filed by wineries and breweries in 2023 against the states of Iowa, Idaho and Oregon.

According to the National Alcohol Beverage Control Association, there are 17 "control states" that own the distribution and sale of their alcohol. The rest, including California, are "open states," which means the sale and distribution of liquor is handled by private businesses and regulated by state legislators.