New Jersey, like most other states, has a three-tier alcohol distribution system: (1) manufacturers and suppliers sell to wholesalers; (2) wholesalers sell to retailers; and (3) retailers sell to consumers. New Jersey’s Alcoholic Beverage Control Laws (“ABC Laws”), which are enforced by the Director of the Division of the Alcoholic Beverage Control (“ABC”), have allowed certain New Jersey farmers and wineries to skip the wholesalers and sell directly to retailers and consumers. Out-of-state wineries and wine aficionados cried foul and challenged the special privileges given to New Jersey producers. On December 17, 2010, the United States Court of Appeals for the Third Circuit issued its opinion in Freeman v. Corzine and sided against the New Jersey ABC.

The primary issue in the case was whether the Dormant Commerce Clause of the Constitution prohibits states from imposing restrictions benefiting in-state economic interests at the expense of out-of-state interests. In short, the Court had to determine whether allowing New Jersey plenary or farm winery licensees to operate outside of the rigid three-tier distribution system gave New Jersey businesses an unfair advantage.

The Court recognized that when “all out-of-state wine, but not all in-state wine [must] pass through an in-state wholesaler and retailer before reaching consumers, the discriminatory character of the system is obvious.” The Court further found that there was no legitimate purpose for this unequal treatment. As a result, the court determined that the privileges that allowed plenary or farm winery licensees to sell directly to retailers or consumers were unconstitutional.

The Court also invalidated a provision of the ABC Laws that required individuals to obtain a special permit from the ABC before importing more than a gallon of wine for personal use.

To remedy the constitutional violations, the Third Circuit remanded to the District Court to decide between (1) the extension of privileges to all out-of-state wineries and farms, which would allow them to enter the New Jersey market without going through New Jersey wholesalers, and would undermine the three-tier system; or (2) the nullification of the privileges enjoyed by New Jersey farms and wineries, which would force New Jersey producers into and otherwise preserve the three-tier system. Thus, it is up to the District Court to choose the ultimate loser – New Jersey farmers or New Jersey wholesalers.

Jennifer P. Smith is an Associate in the Gibbons Real Property & Environmental Department.