In vino veritas: Ninth Circuit tests limits of Arizona’s wine regulations for out-of-staters

PHOENIX (CN) — Two Arizona residents and wine enthusiasts argued before the Ninth Circuit Tuesday that Arizona’s complicated wine distribution system discriminates against out-of-state retailers and violates the U.S. Constitution.

Albert Jacobs and Reed Day both regularly enjoy “rare, vintage or unusual wines.” In Arizona, those bottles often aren’t sold — or come with a much higher price tag than they do in California. So, in October 2019, Jacobs tried to buy four cases of 2009 Bordeaux from a seller in the Golden State. A few days later, Day tried to buy a bottle of Burgundy wine from the same retailer. 

Both purchases were declined, as Arizona law prohibits the direct shipment of wine from a retailer to a consumer without a license.

Sellers can only get a license to ship wine to Arizona residents if they establish a storefront in the state, effectively keeping out-of-state retailers, well, out of the state. Those selling in Arizona also must receive their wine from a licensed Arizona wholesaler, further boxing out companies from beyond the Grand Canyon State.

Jacobs and Day sued Arizona and its liquor regulator in 2021, claiming discrimination and a violation of the dormant commerce clause, despite past circuit-level decisions in similar cases in favor of state control over wine distribution. A trial judge granted summary judgment to the state, finding that requiring physical location isn’t discriminatory because of the state's interest in regulating quality, protecting minors and making revenue through excise taxes.

While the 21st Amendment gives states broad regulatory power over the sale and distribution of alcohol, the dormant commerce clause restricts states from unduly limiting interstate commerce or from favoring in-state commerce. Before a three-judge panel, the defendants argued Tuesday that the state does both of those things. 

“It is clear that the law is discriminatory,” attorney James Tanford said on the defendants’ behalf. “An in-state retailer can get a license and sell online and make home deliveries. There’s no way that an out-of-state retailer can do that.”

“But can’t they?” countered U.S. Circuit Judge Danielle Forrest.

The Donald Trump appointee said large corporations like Walmart and Sam’s Club have established storefronts in Arizona for purposes of obtaining Arizona licenses.

“Doesn’t that establish that out-of-state retailers can get a license in Arizona?” she asked.

Pushing back, Tanford argued that requiring an in-state storefront and wine sourced from Arizona wholesalers eliminates any interstate commerce altogether. 

He said broader regulations would spur more out-of-state economic participation. 

“It is likely than wine retailers who are moving into the online interstate business, it’s in their own economic interest to sell to people in Arizona,” Tanford said.

Tanford’s law firm Epstein Seif Porter and Beutel has litigated similar cases in other states in recent years, but none have been successful, in part due to the broad power given to states by the 21st Amendment. 

Attorney Lucy Davis, representing the state, said the system in place guards state interests in regulating the quantity and quality of wine sold in Arizona, and protects minors and general health interests.

Allowing shipments from out-of-state retailers wouldn’t allow the state to enforce strict health and safety regulations and would therefore reduce the quality of wine coming into the state, Davis argued. 

Forrest asked why the state can’t just require out-of-state retailers to acquire an Arizona license and abide by Arizona rules and regulations. Davis said the existence of a physical storefront is better motivation for companies to follow requirements. 

Forrest also asked why Arizona can’t simply require out-of-state retailers to buy from licensed wholesalers, whether based in Arizona or otherwise.

Davis said the state would have much less enforcement power over wholesalers, which in Arizona are subject to strict inspection requirements. She said requiring a physical presence is the least discriminatory method to ensure health and safety requirements are followed. 

“Arizona doesn’t have to justify the reasons for its laws if it's not discriminatory,” she added. Because a retailer can open a storefront in Arizona, both in and out-of-state retailers are treated equally under the law, she reasoned. 

The panel was rounded out by U.S. Circuit Judge Bridget Bade, a Donald Trump appointee, and U.S. Circuit Judge Milan Smith Jr., who was appointed by George W. Bush. It’s unclear when the panel will issue a ruling.

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