Muddled

Since the repeal of prohibition, the regulation of alcohol in the United States has been a bit of a mess.  In large part, that mess stems from one sentence:

The transportation or importation into any State, Territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited.

This sentence (Section 2 of the 21st Amendment to the U.S. Constitution), had the effect of allowing the states the right to regulate alcohol in such matter as they thought appropriate.  The states, with their varied constituencies, traditions and sensibilities, not surprisingly had very different thoughts about how to approach the regulation of alcohol.  Mississippi, for example, continued to enforce statewide temperance laws until 1966.

But statewide temperance was the exception, rather than the rule.  Most states began to allow the sale and consumption of alcohol – which meant that it was necessary for most states to begin to structure a regulatory framework around the product.  Often but not always, that structure was something akin to the three-tier structure that is in place in most states today.  Occasionally it was more of a two-tier affair.  [Note:  For a very good discussion of early regulatory approaches – and how they were not always three-tier systems – see Marc Sorini’s excellent article “The Evolving Alcohol Regulatory System“.] And in most cases, it was a work in progress.

That work continues today.  Recently, Washington, Utah and Pennsylvania have taken steps to liberalize their liquor laws.  And this past Friday, the Governor of Colorado signed into law a bill which will allow grocery stores to begin to sell full-strength beer and wine.

In most cases, liberalization of state alcohol laws is touted as a benefit to consumers.  That said, the impetus for those changes typically results from industry participants rather than the consumers themselves.  Here in Washington, for example, the privatization of liquor stores in 2011 was accomplished primarily as a result of Costco spending almost $21 million to support a ballot initiative.  Passage of the measure allowed Costco (and other retailers) to begin selling spirits.  But consumers who hoped getting the state out of the business of selling hooch would result in lower prices have been largely disappointed (at least in the short-term).

Part of that cost to consumers, however, is simply the regulatory burden flowing from the patchwork of varied (and occasionally inconsistent) laws.  Compliance requires diligence and diligence requires resources.  So a start-up distributor wanting to carry the small lines of startup or craft distilleries may be at a disadvantage to the existing larger distributor not only because it may not be as well-funded or have the number and depth of market relationships as a larger distributor, but also because the larger distributor will have the back-office wherewithal to handle the regulatory complexities that multiply with the entry into each new state.  In essence, therefore, the regulatory challenges presented by federalism and strong state participation in the regulation of alcohol may serve to encourage the growth of dominant market players at the expense of upstarts.

What do we make of this?  Would we be better off moving toward a uniform approach?  For example, would we be more successful simultaneously protecting the public while fostering the responsible growth of the industry if we created a TTB safe harbor for certain types of activities or operations which effectively preempted state regulation?  We have done this in other areas of law with some success.  For example, the passage of the National Securities Markets Improvement Act of 1996 (“NSMIA”) (and associated rulemaking by the SEC), created a federal safe harbor for certain private offerings of securities, with the result that state securities regulators could no longer require merit review of those offerings before so-called “covered securities” could be sold to the public in their states.

One can envision a similar approach with spirits, in which an industry participant meeting criteria established by the TTB could bypass some or all of a conflicting state regulatory regime.  As with the securities example, this would seem to be an opportunity to reduce regulatory complexity and thereby reduce cost.  Would it work? Quite possibly.  But first we’d need to get it passed into law.  And given the constitutional issues associated with this approach (and the certainty that state LCBs would object to such an overpass to their regulations), that would be no easy task.