The Franchise Memorandum

A federal court in Washington denied the State of Washington’s motion to dismiss an out-of-state distiller’s constitutional challenge to Washington’s distillery regulatory scheme. Shady Knoll Orchards & Distillery LLC v. Postman, 2023 WL 7004422 (E.D. Wash. Oct. 24, 2023). Plaintiffs Shady Knoll Orchard and Distillery, a distillery located in the State of New York, and two Washington state citizens brought a challenge under 42 U.S.C. § 1983 against Washington’s restrictions on the direct sale and shipment of liquor by out-of-state distilleries to Washington consumers. Under the regulatory system, manufacturers sell to distributors, distributors sell to retailers, and retailers sell to consumers. A distiller (i.e., a manufacturer) may also act as a distributor or retailer, provided it has a physical location in Washington. The physical presence requirement prevents out-of-state distillers from selling product directly to consumers in Washington state. Shady Knoll sought a judgment declaring that the Washington state law discriminates against interstate commerce, in violation of the dormant commerce clause, and further sought an injunction preventing Washington from enforcing the law. The State of Washington moved to dismiss Shady Knoll’s claims, arguing its three-tier regulatory system is protected by the 21^st Amendment of the U.S. Constitution, and that Shady Knoll’s challenge would allow out-of-state distillers to bypass the state’s regulated market.

The district court disagreed with the State’s broad application of the 21^st Amendment and denied its motion to dismiss. The court reasoned that Supreme Court caselaw provides that the 21^st Amendment does not confer limitless authority to states to regulate alcohol trade. Instead, to discriminate against out-of-state product, states must demonstrate that a facially discriminatory law serves a legitimate local purpose, and they must do so by providing more than mere speculation or unsupported assertions. The court found that Washington’s rationale for the law – preserving its three-tier system – did not support its discrimination against out-of-state distillers. The State further argued that Fourth, Sixth, and Eighth Circuit appellate court caselaw upheld similar three-tier structures in other states. But the court noted that caselaw from the First, Seventh, and Eleventh Circuits have struck down similar regulatory schemes. Thus, the court determined that Washington did not show that Shady Knoll failed to state a plausible claim of relief, thereby denying the motion.