On July 1, 2019, we blogged about the Supreme Court’s ruling striking down various Tennessee regulations whose purpose and effect was to limit the ability of non-Tennessee actors to compete in the retail market for alcoholic beverages. Tennessee Wine & Spirits Retailers Ass’n v. Thomas, 139 S.Ct. 2449 (2019). Last month, the Fifth Circuit addressed a somewhat different restriction imposed by the State of Texas. Wal-Mart Stores, Inc. v. Texas Alcoholic Beverage Com’n, 935 F.3d 362 (5th Cir. 2019).

Under Texas law, a publicly traded corporation cannot obtain a license to sell alcohol at retail. The ban applies as much to Texas corporations as it does to foreign corporations. Conversely, out-of-state businesses may obtain a permit so long as they are not publicly traded.

Wal-Mart wanted to sell alcohol at retail in Texas. In 2018, it obtained an injunction against the Texas statute based on the dormant commerce clause, the same legal theory under which the Tennessee case was decided. Last month, the Fifth Circuit reversed and remanded for reconsideration.

The statute is facially neutral, so the Fifth Circuit assessed whether it had a purpose or effect to discriminate against out-of-state actors. The basic formula for assessing a purpose claim is set forth in Village of Arlington Heights v. Metropolitan Housing Dev. Corp., 429 U.S. 252 (1977).

One Arlington factor is whether the state has a history of discriminating against out-of-state actors. Here, the Fifth Circuit held that such a pattern was clear. Commencing in 1935, Texas banned out-of-state individuals and companies from obtaining permits to sell alcohol at retail.  Texas continued to enforce durational residency requirements that clearly discriminated against out-of-state persons and entities for 12 years after the Fifth Circuit held they violated the dormant commerce clause.

Another Arlington factor is whether the legislative history reflects an intent to discriminate against out-of-state actors. The District Court had held that Wal-Mart satisfied this factor, based primarily on after-the-fact statements by the package store trade association, which had written the bill and lobbied for its passage. Those statements made clear that the trade association proposed the statute to protect its members from competition.

The Fifth Circuit held that this was error. The only member of the legislature to testify in hearings on the bill claimed that its true purpose was to require local accountability. The Fifth Circuit held that after-the-fact statements by the trade association were not sufficient indicia of a legislative intent to discriminate in favor of local persons and businesses.

We regard this part of the opinion as problematic. In the Tennessee case, the Supreme Court had specifically rejected accountability as a basis for the residential duration rules there at issue. It is entirely too easy for a well-advised legislator to testify publicly about a permissible objective while engaging in wink-and-a-nod practices to cover up the real purpose. The whole purpose of a trade association is to protect its members from, inter alia, outside competition. When a trade association writes a bill and lobbies for it, it is a perfectly reasonable inference that it is seeking anti-competitive ends.

The Fifth Circuit also faulted the District Court for failing to apply a presumption of good faith action by the legislature. The District Court held that enactment of the ban on public companies immediately following an injunction against durational residency requirements was proof of the legislature’s intent to discriminate. The Fifth Circuit decided that this holding improperly imposed a burden on the legislature to prove its purity.

More generally, the Fifth Circuit thought the District Court had focused on the wrong issue, ignoring corporate form. According to the Fifth Circuit evidence of discrimination based solely on company form was insufficient to establish a dormant commerce clause violation.

The Fifth Circuit concluded that history of discrimination against out-of-state person or entities, standing alone, was not sufficient to establish a dormant commerce clause violation. Because there was other circumstantial evidence of discrimination, however, the appellate court remanded for reconsideration.

The Fifth Circuit also briefly considered whether the statute had a discriminatory effect on interstate commerce. It concluded that, while the statute did discriminate against publicly traded companies, that was not discrimination against interstate commerce. It had precisely the same effect on Texas publicly traded companies as it did on out-of-state publicly traded companies.

The Fifth Circuit’s final discussion of the dormant commerce clause addressed whether the Texas statute imposed an undue burden on interstate commerce under Pike v. Bruce Church, Inc., 397 U.S. 137 (1970). On the present record, the Court held there was no burden at all on interstate commerce. Out-of-state corporations were free to seek permits as long as they were not publicly traded. The District Court should have looked to evidence of whether the ban on publicly traded companies adversely affected the flow of interstate commerce and the case was remanded so that it could address those issues.

The Fifth Circuit affirmed the judgment in favor of the State on Wal-Mart’s equal protection claim. Rational basis review merely requires some reasonable public policy and the State’s interest in reducing excessive use of alcohol by reducing competition, thereby increasing prices, was clearly related to that interest.