Federal Court Rejects Washington’s Attempt to Dismiss DtC Lawsuit

Alex Koral | November 6, 2023

In late October, the District Court of Eastern Washington rejected an effort by the state to dismiss a lawsuit challenging its prohibition on direct-to-consumer (DtC) shipping of spirits by out-of-state producers. While the case remains open before the court, the full-throated denial of the motion to dismiss was notable for what it signals about how the case may resolve and for what it could mean for future DtC litigation.

Shady Knoll Orchards & Distillery v. Postman challenges a provision in Washington’s law that permits in-state distilleries to ship their spirits DtC to Washington consumers but prohibits out-of-state distilleries from doing the same. Washington law allows local distillers to act as a distributor or retailer within Washington, selling spirits produced by them or other Washington distillers to consumers. As long as they maintain a physical retail location in the state, the distiller can also engage in online sales that are fulfilled through a DtC shipment.

Shady Knoll, a New York distillery, along with three Washington consumers, sued the state, claiming that the law was unconstitutional as it improperly restricted interstate commerce and violated the precedent established in Granholm v. Heald. In Granholm, the Supreme Court rejected laws in New York and Michigan that permitted DtC shipping by only in-state wineries as a violation of the Constitution’s Commerce Clause.

Washington attempted to dismiss the case, arguing that, even if the law was discriminatory (which it did not concede), the 21st Amendment gave it free rein to set up its internal alcohol market, including the right to establish laws that discriminate against out-of-state interests. The state likely felt confident about making this argument, as in the last few years many other district courts have rejected DtC shipping lawsuits for similar reasons.

However, the Washington district court roundly rejected this argument, noting that while the state has a legitimate interest in the health and safety of its citizens, enabling it to regulate its internal alcohol market, the state law itself contradicted the state’s claims. That is, if the state was concerned about the risks of DtC shipping of spirits, it failed to demonstrate why that risk was only applicable to out-of-state distillers. Instead, Washington must provide clear and convincing evidence as to why shipping by out-of-state distillers threatens the health and safety of Washington consumers in a way that in-state shipping doesn’t.

While it remains to be seen how the court ultimately rules in the case, it’s a positive sign for the plaintiffs here and for proponents of DtC shipping broadly that it is applying the proper standards of review for beverage alcohol litigation as set out in Granholm and the 2018 Tennessee Wine & Spirits case.

What this could mean for other discriminatory DtC shipping laws

Indeed, Washington is hardly alone in having DtC shipping laws that apply only to in-state parties.

For instance, North Carolina law permits DtC shipping of beer by in-state brewers, but not out-of-state brewers. And California recently passed a bill that extends until 2025 a “temporary” spirits DtC shipping law that is only available to craft distillers licensed by the state. (Efforts have been made in the past few years to make this law permanent and extend it to distillers across the country, but they have been stymied by in-state industry infighting.)

Even though it has been seemingly obvious since the Granholm ruling in 2005 that if states want to establish DtC shipping laws for in-state producers, they must also grant that permission to out-of-state producers, these discriminatory laws remain in place. If Shady Knoll prevails and overturns Washington’s law, that should spark efforts by producers to remove similar laws in other states.

Notably, distillers and brewers are not the only parties affected by discriminatory DtC shipping laws. Indeed, retailers have been very active in challenging such laws in recent years. These efforts have been largely unsuccessful, though, as many courts have so far uncritically accepted the states’ positions that preventing out-of-state retailers from shipping DtC, but allowing in-state retailers to do so, is part of their 21st Amendment authority.

As such, the rejection by the Eastern District of Washington of that assertion, and that states must actually prove their case with evidence, gives hope for retailers going forward. (Notably, Washington’s DtC spirits shipping law is primarily written for retailers, even though the challenger in this case is a distiller.) While whatever ruling the court ends up making will apply only to this specific Washington law, it can provide direction and guidance for other courts reviewing similar laws.

Ultimately, states would do well to avoid these legal challenges by simply adopting non-discriminatory DtC shipping laws in the first place. Indeed, with clear and widespread interest among consumers for expanded access to DtC shipping of alcohol, we can hope that many more states will act to amend their laws in the coming years and establish a proper, regulated national DtC shipping market for beverage alcohol.

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