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Extraterritorial Laws And The Commerce Clause

In general, the Commerce Clause of the U.S. Constitution reserves to the U.S. Congress the ability to regulate commerce between and among the states of the United States and between the United States and foreign nations. The Supreme Court of the United States has long held that the Commerce Clause contains a negative corollary that forbids any state from imposing an unjustifiable burden on interstate or international commerce. This corollary, though not actually found in the Constitution, is called the Dormant Commerce Clause.

The Dormant Commerce Clause and alcoholic-beverage regulation have long been intertwined. In the 19th century, courts began cobbling two concepts together in cases involving states imposing discriminatory state fees only on alcohol importers or unjustifiably preferring in-state alcoholic beverages over out-of-state beverages. Just as they did then, courts today invoke the Dormant Commerce Clause against many alcoholic beverage laws they deem unduly burden interstate or foreign commerce.

One example of this involves “affirmation laws,” which required suppliers to file affirmations that the price they charged wholesalers in the state for a product were no greater than the lowest price charged in any other state for the same product. The U.S. Supreme Court eventually ruled that such laws, including New York’s prior affirmation law, impose an undue burden on interstate commerce because they not only restrict the price within the state attempting to enforce the affirmation law but result in suppliers adjusting their prices in other states.

If a law or regulation explicitly favors the economic activities of citizens of the state over citizens of another state, or if it attempts to protect commerce within the state from out-of-state competition, that law or regulation will usually be a violation of the Dormant Commerce Clause in the eyes of judges. Arguments that the law or regulation has a neutral purpose, is based on a state interest, or its effect on interstate commerce is minimal will often fail unless the state can show there is an alternative that is both reasonable and nondiscriminatory.

Section 101(1)(a) of New York’s Alcoholic Beverage Control Law (“ABC Law”) states, “It shall be unlawful for a manufacturer or wholesaler licensed under this chapter to …[b]e interested directly or indirectly in any premises where any alcoholic beverage is sold at retail … by stock ownership, interlocking directors, mortgage or lien or any personal or real property, or by any other means.” 

This tied-house law does not distinguish between in-state and out-of-state suppliers. The State Liquor Authority (“SLA”) and New York courts interpret it to apply to any supplier in the world. Does that violate the Dormant Commerce Clause?

In the case Rihga Int’l USA, Inc. v.  NY State Liquor Auth., 84 N.Y. 876 (1994), the New York Court of Appeals analyzed this law with respect to foreign suppliers holding a small interest in a New York retailer. In that case, three unrelated manufacturers of alcoholic beverages indirectly owned an interest in a hotel that applied for a New York liquor license. The application was denied because the SLA held that such license was barred by Section 101(1)(a). The Court agreed and explained that the law does not allow the Authority to make an exception even for a de minimis interest under any circumstances.

All three of the manufacturers were Japanese breweries. At the time, none held any licenses in New York. Moreover, each of the three stipulated that they would not sell their products to or in the hotel seeking a license. Although it was not raised in the case, it is worth asking, “Does this New York tied-house law violate the Dormant Commerce Clause by placing an undue burden on interstate or foreign commerce?” We believe the answer is no.

First, there is no direct or indirect discrimination. The laws apply equally to citizens of the state of New York, citizens of other states and citizens of foreign countries. In addition, the laws are not intended to and do not have an effect upon laws or business outside the state. The three Rihga manufacturers remained free to manufacture their products. The fact that they had invested in hotels that sold outside the state of New York did not prevent them from continuing to sell their beverages into the state. The only restriction imposed by the statute is that the manufacturer could not have an interest in a business that held an on-premises license in the state. Only state laws that impose a burden on interstate or foreign commerce are forbidden by the Dormant Commerce Clause. But what about other tied-house laws or regulations? Though many are commonplace today, they are continuously being challenged in courts across the country. Affirmation laws were at one time just another price of doing business, but they eventually evaporated. Which ones will be next?

This article is not intended to give specific legal advice.  Before taking any action, the reader should consult with an attorney familiar with the relevant facts and circumstances.

Written by

Keven Danow

Keven Danow

Founding and Senior Partner
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