Wal-Mart Stores, Incorporated v. TX Alcohol , 935 F.3d 362 ( 2019 )

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IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
August 15, 2019
No. 18-50299
Lyle W. Cayce
Clerk
WAL-MART STORES, INCORPORATED; WAL-MART STORES TEXAS,
L.L.C; SAM'S EAST, INCORPORATED; QUALITY LICENSING CORPORA-
TION,
Plaintiffs - Appellees Cross-Appellants
v.
TEXAS ALCOHOLIC BEVERAGE COMMISSION; KEVIN LILLY, Presiding
Officer of the Texas Alcoholic Beverage Commission; IDA CLEMENT
STEEN,
Defendants - Appellants Cross-Appellees
TEXAS PACKAGE STORES ASSOCIATION, INCORPORATED,
Movant - Appellant Cross-Appellee
Appeal from the United States District Court
for the Western District of Texas
Before DAVIS, HAYNES, and GRAVES, Circuit Judges.
JAMES E. GRAVES, JR., Circuit Judge:
Plaintiff-Appellee Wal-Mart Stores, Incorporated and three of its subsid-
iaries (collectively, “Walmart”), brought 42 U.S.C. § 1983 claims against the
Texas Alcoholic Beverage Commission and three of its commissioners (collec-
tively, the “TABC”), to challenge four Texas statutes (Tex. Alco. Bev. Code §§
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22.04, 22.05, 22.06, 22.16) 1 that govern the issuances of permits that allow for
the retail sale of liquor in Texas (called “package store” permits, or “P per-
mits”). Section 22.16 prohibits public corporations from obtaining P permits in
Texas. Walmart argued that the ban violates the dormant Commerce Clause
of the United States Constitution and the Equal Protection Clause of the Four-
teenth Amendment. Later, we granted the Texas Package Store Association’s
(“TPSA”) motion to intervene as a matter of right, in defense of the statutes.
See Wal-Mart Stores, Inc. v. Tex. Alcoholic Beverage Comm’n, 834 F.3d 562 (5th
Cir. 2016).
We now consider the TABC and TPSA’s (“appellants”) appeal of the dis-
trict court’s conclusion that the public corporation ban offends the dormant
Commerce Clause, and Walmart’s cross-appeal of the district court’s determi-
nation that the public corporation ban does not violate the Equal Protection
Clause. We affirm the part of the district court’s judgment rejecting Walmart’s
Equal Protection challenge to the public corporation ban. Conversely, because
the district court erred in its findings regarding the discriminatory nature and
burden imposed by the public corporation ban, Walmart’s dormant Commerce
Clause challenge to § 22.16 is remanded.
I. Facts
A.
Texas regulates the sale and importation of alcoholic beverages through
a three-tier system that requires separate licenses and permits for producers,
wholesalers, and retailers who meet certain eligibility requirements. See Wine
Country Gift Baskets.com v. Steen, 612 F.3d 809, 818–19 (5th Cir. 2010) (noting
that Texas has a three-tier system “in which producers sell to state-licensed
wholesalers, who sell to state-licensed retailers”). Liquor retailers must obtain
1 Walmart’s challenge to Tex. Alco. Bev. Code § 22.06 is not at issue on appeal.
2
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a separate permit for each physical location where liquor is sold for off-prem-
ises consumption. The permits authorize an unlimited volume of sales from the
permitted location. The TABC is the state agency responsible for issuing per-
mits and enforcing the Texas Alcoholic Beverage Code. The TPSA is the trade
association of Texas package stores that are majority-owned by Texans.
There is one permit relevant to this appeal. P permits authorize the sale
of liquor, wine, and ale for off-premises consumption. Tex. Alco. Bev. Code §
22.01. Texas liquor stores must hold a P permit.
At the time of this litigation, there were 2,578 active P permits issued by
the TABC, and 574 were owned by a package store chain (a business holding
six or more P permits). There were 21 active package store chains. Since 1944,
package store chains have grown in size and volume of sales, although the total
number of package stores has remained approximately the same. The package
store chains have a significant share of the Texas market, but it is not clear
how much. The largest package store chains control seven of the nine seats on
the TPSA’s executive committee.
B.
Texas’ public corporation ban proscribes “any entity which is directly or
indirectly owned or controlled, in whole or in part, by a public corporation”
from obtaining a P permit. Tex. Alco. Bev. Code § 22.16(a). The statute defines
a “public corporation” as a corporation “whose shares . . . are listed on a public
stock exchange” or “in which more than 35 persons hold an ownership inter-
est.” Id. § 22.16(b). Public corporations can hold any of the other seventy-five
types of alcohol permits that Texas issues.
3
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Walmart is a retailer that is the largest public company in the world. 2
Operating approximately 5,000 stores in the U.S., Walmart currently sells beer
or wine in forty-seven states, including 668 locations in Texas, and liquor in
thirty-one states. Walmart’s goal is to increase its sales and profits from alco-
holic beverages in Texas. Walmart has plans to open liquor stores adjacent to
some of its existing Texas retail locations. However, because it is a publicly
traded corporation without a majority shareholder, Walmart cannot imple-
ment its plan unless the public corporation ban is invalidated.
Walmart unsuccessfully lobbied the Texas Legislature to repeal § 22.16. 3
After its failed attempt to obtain a legislative remedy, Walmart sued the TABC
in federal court to have the judiciary neutralize the public corporation ban, and
this court subsequently granted the TPSA’s motion to intervene.
After a week-long bench trail, the district court concluded, inter alia, that
the public corporation ban: (1) has a discriminatory purpose and the ban’s bur-
den on interstate commerce is clearly excessive when compared to the local
benefits, and (2) does not violate the Equal Protection Clause. The district
court enjoined the TABC from enforcing the public corporation ban. This ap-
peal and cross-appeal followed. We consider whether the public corporation
ban is unconstitutional under the dormant Commerce Clause and the Equal
Protection Clause. 4
2 As of 2018, Walmart had consolidated revenue of over $500 billion, making it the
largest company in the world. Fortune 500 Companies 2018: Who Made the List, FORTUNE
MAG. (May 21, 2018), http://fortune.com/global500/.
3 Along with the other aforementioned statutes that we do not address at this time.
4 The district court exercised subject matter jurisdiction over this case based on federal
question jurisdiction under 28 U.S.C. § 1331. We have jurisdiction over this appeal pursuant
to 28 U.S.C. § 1291.
4
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II. Standards of Review
We review a district court’s judgment regarding the constitutionally of a
statute de novo. Allstate Ins. Co. v. Abbott, 495 F.3d 151, 160 (5th Cir. 2007).
The district court’s findings of fact relevant to the constitutional question are
reviewed for clear error. Id. Because this case involves a dormant Commerce
Clause challenge, one threshold issue is whether the public corporation ban
was enacted with the purpose to discriminate against interstate commerce. Id.
at 160–62. In Allstate, this court applied the Arlington 5 factors to determine
whether purposeful discrimination inspired a state legislature’s actions in vio-
lation of the dormant Commerce Clause. 6 Therefore, we do the same. 7 “[A] dis-
trict court’s finding of fact on the question of discriminatory intent is reviewed
for clear error.” Abbott v. Perez, 138 S. Ct. 2305, 2326 (2018). “If the district
court’s findings are plausible in light of the record viewed in its entirety, we
must accept them, even though we might have weighed the evidence differently
if we had been sitting as a trier of fact.” Veasey v. Abbott, 830 F.3d 216, 229
(5th Cir. 2016) (en banc) (quotation marks omitted). “However, when the dis-
trict court’s ‘findings are infirm because of an erroneous view of the law, a re-
mand is the proper course unless the record permits only one resolution of the
factual issue.’” Id. (quoting Pullman–Standard v. Swint, 456 U.S. 273, 292
(1982)). In the latter case, we should reverse and render a decision. Id.
5 See Village of Arlington Heights v. Metropolitan Hous. Dev. Corp., 429 U.S. 252, 266–
68 (1977).
6 Allstate, 495 F.3d at 160.
7 Although it is debatable whether the Arlington factors should be applied when con-
sidering whether purposeful discrimination motivated legislative action in a dormant Com-
merce Clause case, given our well-established rule that one panel of the Fifth Circuit cannot
overrule the prior decision of another panel, we need not consider arguments challenging
application of the factors to this case. See Gardes Directional Drilling v. U.S. Turnkey Expl.
Co., 98 F.3d 860, 868 (5th Cir. 1996) (citing Broussard v. Southern Pac. Transp. Co., 665 F.2d
1387, 1389 (1982) (en banc)).
5
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III. Challenges
A.
The Supreme Court has long held that the Commerce Clause “prohibits
state laws that unduly restrict interstate commerce.” Tennessee Wine & Spirits
Retailers Ass’n v. Thomas, 139 S. Ct. 2449, 2459 (2019). This interpretation is
known as the dormant Commerce Clause. “‘This negative aspect of the Com-
merce Clause’ prevents the States from adopting protectionist measures and
thus preserves a national market for goods and services.” Tennessee Wine, 139
S. Ct. at 2459 (quoting New Energy Co. of Ind. v. Limbach, 486 U.S. 269, 273
(1988)).
“A statute violates the dormant Commerce Clause where it discriminates
against interstate commerce either facially, by purpose, or by effect.” Allstate,
495 F.3d at 160. Given that this case involves a law that regulates liquor re-
tailers, the dormant Commerce Clause analysis must be considered in light of
the Twenty-first Amendment. Section 2 of the Amendment grants states the
authority to regulate the transportation, importation, possession, and use of
alcohol within their own borders. See U.S. Const. amend. XXI, § 2.
Recently, in Tennessee Wine, the Court reaffirmed what this court had
previously concluded: 8 Section 2 does not grant states the power to violate the
“nondiscrimination principle” of the dormant Commerce Clause. 139 S. Ct. at
2470 (citing Granholm v. Heald, 544 U.S. 460, 487 (2005)). The Court acknowl-
edged that, under § 2, states “remai[n] free to pursue their legitimate interests”
in addressing the health and safety risks associated with the alcohol trade. Id.
at 2472 (alteration in original) (quotation marks omitted). Therefore, “each
variation [of law] must be judged based on its own features.” Id.
8 In Cooper II, this court rejected the TPSA’s assertion that Commerce Clause protec-
tions do not apply to state alcohol laws regulating the retailers and wholesalers in a three-
tier system. 820 F.3d at 743.
6
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The Court clarified the standard for evaluating a discriminatory alcohol-
related regulation, charging courts to “ask whether the challenged [discrimi-
natory] requirement can be justified as a public health or safety measure or on
some other legitimate nonprotectionist ground.” Id. at 2474. The standard has
teeth. “[M]ere speculation” or “unsupported assertions” of fact are insufficient
to validate an otherwise discriminatory law. Id. If the “predominant effect” of
the discriminatory law is protectionism and not “the protection of public health
or safety,” the law is not shielded by § 2. Id. at 2474. In conducting the inquiry,
courts must look for “concrete evidence” that the statute “actually promotes
public health or safety,” or evidence that “nondiscriminatory alternatives
would be insufficient to further those interests.” Id.
Section 22.16 is a facially neutral statute that bans all public corpora-
tions from obtaining P permits irrespective of domicile. Therefore, we focus on
whether the ban was enacted with a discriminatory purpose or has a discrimi-
natory effect on interstate commerce.
B.
Although the district court correctly cited the Arlington framework, some
of its discriminatory purpose “findings are infirm.” Veasey, 830 F.3d at 230
(quotation marks omitted). The record does not support “only one resolution of
the factual issue,” as there is evidence that could support the district court’s
finding of a purpose to discriminate, so we must remand for a reweighing of
the evidence on that issue. Id.
“The burden of establishing that a challenged statute has a discrimina-
tory purpose under the Commerce Clause falls on the party challenging the
provision.” Allstate, 495 F.3d at 160. We consider the following non-exhaustive
factors when determining whether a state legislature’s actions amount to pur-
poseful discrimination against interstate commerce: (1) whether the effect of
the state action creates a clear pattern of discrimination; (2) the historical
7
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background of the action, which may include any history of discrimination by
the decisionmakers; (3) the “specific sequence of events leading up” to the chal-
lenged state action, including (4) any “departures from normal procedures[;]”
and (5) “the legislative or administrative history of the state action, including
contemporary statements by decisionmakers.” Id. Legislators’ awareness of a
discriminatory effect “is not enough: the law must be passed because of” that
discriminatory effect. Veasey, 830 F.3d at 231 (applying the Arlington factors).
The challenger must show that the discriminatory effect was “a substantial or
motivating factor” leading to the enactment of the statute. Id. (quotation marks
omitted). If the challenger meets that burden, defendants must “demonstrate
that the law would have been enacted without this factor.” Id.
First, the district court properly found that Texas has a clear history of
discriminating against out-of-state alcohol retailers. From the passage of its
Liquor Control Act in 1935, Texas had prohibited out-of-state individuals and
companies from owning package stores. In Cooper v. McBeath, this court inval-
idated Texas laws imposing durational residency requirements on alcohol re-
tail store owners. 11 F.3d 547 (5th Cir. 1994) (Cooper I). While Cooper I was
pending, the Texas Legislature enacted House Bill 1445, in an attempt to moot
the Cooper I litigation. The bill repealed the residency requirements at issue
in the case. Texas kept durational residency requirements for other permits.
Soon after the governor of Texas signed the bill, the Cooper I plaintiffs moved
to dismiss the appeal as moot. However, this court denied the motion and is-
sued an opinion striking down the residency requirements, with language
broad enough to apply to all the alcohol permits. Id. at 550–51, 554. Despite
the Cooper I decision, Texas enforced durational residency requirements as ap-
plied to P permits for another twelve years—stopping enforcement only after
the practice was permanently enjoined by a federal district court. S. Wine &
Spirits of Texas, Inc. v. Steen, 486 F. Supp. 2d 626, 633 (W.D. Tex. 2007). The
8
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evidence relied on by the district court was “not long past history.” Veasey, 830
F.3d at 232. Texas decisionmakers have a history of discrimination. 9
Addressing a second factor, the district court erred in finding that the
legislative history of § 22.16 includes direct evidence of a purpose to discrimi-
nate against interstate commerce. The district court made much of the fact
that § 22.16 was enacted in 1995, one year after Cooper I. A lawyer and lobbyist
who worked on behalf of the TPSA drafted the corporation ban. The TPSA,
which had vigorously defended the residency requirements struck down by this
court, later admitted that there was a fear that “large stores could disrupt what
had been a very stable business climate” and there could be a “Wal-Martiza-
tion” of the Texas package store market. Further, the Texas legislature was
aware that, but for the Cooper I decision, the TPSA would not have suggested
and supported the public corporation ban.
Based largely on those findings regarding the conduct and motivations
of the TPSA, the district court concluded that the Texas legislature enacted the
public corporation ban with the same protectionist motivations. This despite
the provision’s drafter testifying that he told legislators the purpose of the bill
was accountability. He was the only witness at the committee hearings and
told the legislators that the purpose of the bill was to promote accountability,
or “to have real human beings who are easily identifiable, who are close to the
business, and who ultimately bear personal responsibility for the actions of the
package store.” Years later—at trial—he admitted that he “knew that any bill
[enacted] might be challenged” and that his “assignment was to craft a bill
which . . . would survive a commerce clause challenge.” The district court de-
termined that the “TPSA’s chief concern was maintaining the business climate
9 Walmart also argues that actions taken by the TPSA evidence a history of discrimi-
nation. However, the actions of the TPSA do not control this inquiry.
9
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created by the residency requirement,” and that the legitimate rationales con-
cerning accountability were “pretextual.” However, in Veasey, we reiterated
that overreliance on “post-enactment testimony” from actual legislators is
problematic, and not “the best indicia of the Texas Legislature’s intent.” Ve-
asey, 830 F.3d at 234. In light of Veasey, after-the-fact statements made by a
non-legislator are certainly not sufficient indicia of legislative intent.
The district court did not find evidence connecting any Texas legislator
to the conclusion that the accountability rationale was pretextual. The only
comments from a Texas legislator the district court relied on were made by
state Senator Kenneth Armbrister. When asked to explain the purpose of the
public corporation ban, Armbrister stated that the ban meant “you can’t have
a package store inside a Walmart” and “Walmart can’t own the package store.”
As the district court noted, during the senate floor debate on Senate Bill 1063
(which became § 22.16), Armbrister agreed with state Senator Henderson’s re-
mark that the Legislature “wanted to have somebody from Texas with a license
that you could get ahold of . . . to enforce the code.”
However, the district court did not provide the context of the senators’
statements. Armbrister and Henderson were engaged in a discussion about the
motivation for the public corporation ban when Armbrister stated that the pur-
pose was to have a better way to “track” package store owners. Specifically,
Armbrister stated, “I think what” both “the industry . . . and the [TABC] was
trying to do is a better tracking system, because . . . you’ve got large-scale cor-
porations that operate . . . it all ties in to(sic) the operation phase.” Henderson
replied by explaining that a corporation could own a package store by obtaining
the permit through a local licensee (presumably because Texas previously had
enforceable durational-residency requirements), referring to the mechanism
employed by corporations as a “fake-a-roo.” Next, Armbrister attempted to ex-
plain some exemptions to the ban when Henderson replied that the “fake-a-
10
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roo” was used because the legislators previously wanted only people from
Texas to hold P permits “to enforce the code.”
Significantly, Henderson asked Armbrister, “It’s not the bill . . . that
keeps foreign ownership from coming in and . . . getting licenses, that kind of
thing?” (emphasis added). To which Armbrister answered, “No. Those . . . both
those bills are still pending in committee.” Henderson replied, “Good. Thank
you.” Near the close of the floor debate, the Texas Senate voted to pass the bill.
The floor debate was devoid of discriminatory remarks directed toward out-of-
state competition generally. The transcript reveals that there were entirely
separate bills being advanced to address foreign owners. Moreover, the “Expla-
nations and Arguments” in support of Senate Bill 1063 indicate that the reason
for the ban was to ensure that owners were known to the community and “could
be held accountable for responsible operation.” The document further states,
“Courts have recently struck down . . . Texas resident law saying that it penal-
ized out of state citizens” but there remained a need to have a human who is
easily identifiable and responsible for the actions of a given package store busi-
ness. The legislative history is merely “evidence of a legislative desire to treat
differently two business forms . . . a distinction based not on domicile but on
business form.” Allstate, 495 F.3d at 161.
There is no direct evidence of a discriminatory purpose in the legislative
history; Plaintiffs rely on circumstantial evidence. The motivations and lobby-
ing efforts of the TPSA are not direct evidence of legislative purpose. An ad-
mission that the drafter sought to create a law that would survive a constitu-
tional challenge is not evidence of a discriminatory legislative purpose. There
are no “stray protectionist remarks” in the legislative history, and even if there
were, such remarks “are insufficient to condemn” an otherwise nondiscrimina-
tory statute. Id.
11
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Turning to a third factor, the district court failed to apply the “presump-
tion of legislative good faith” in finding that the sequence of events that led to
the enactment of § 22.16 evidences a discriminatory purpose. Perez, 138 S. Ct.
at 2324. In line with the district court, Walmart relies on the Texas Legisla-
ture’s failed attempt to moot Cooper I during the 1993 session and the Legis-
lature’s enactment of the public corporation ban during the 1995 session. The
TABC argues that it is irrelevant that the corporation ban was enacted in re-
sponse to Cooper I. TPSA argues that the district court’s conclusion based in
part on post-Cooper I conduct is inconsistent with controlling case law.
In Perez, the Supreme Court made it clear that “[t]he allocation of the
burden of proof and the presumption of legislative good faith are not changed
by a finding of past discrimination.” Id. at 2324. Past discrimination is merely
one potential evidentiary source. Id. The district court specifically found that
“if not for the Fifth Circuit striking down Texas’s residency requirement, TPSA
would not have proposed, and the Legislature would not have enacted, the ban
on public corporations holding package store permits.”
While that finding might be true, there are problems with concluding
those events evidence a purpose to discriminate. As stated previously, the
TPSA’s motivations and actions are not sufficient indicia of legislative intent.
As a result, the only remaining evidence is the Texas Legislature’s actions in
support of a discriminatory purpose during Cooper I. The district court flipped
“the evidentiary burden on its head” based only on the recent history of dis-
crimination. Id. at 2325. More than requiring Walmart to present specific
events evidencing a discriminatory purpose connected to the public corporation
ban, the district court placed the burden on appellants to provide evidence that
the Texas Legislature had a true “change of heart” with respect to the resi-
dency requirements while enacting a ban that affects public corporations irre-
spective of location. Id. at 2326.
12
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The burden flip was especially problematic because the district court’s
findings arguably indicate that the Legislature sought to comply with the de-
mands of the dormant Commerce Clause. The district court noted that Texas
did not stop enforcing durational residency requirements as applied to package
store owners until 2007, more than twelve years after § 22.16 was enacted.
This also meant that the public corporation ban was enforced against Texas
corporations while Texans still believed it was proper to deny would-be pack-
age store owners from outside the state. As far as the record reveals, Texas
corporations were the only companies affected by the public corporation ban
for at least a decade after it was enacted. 10 In any event, the district court
committed clear error by failing to apply a presumption of good faith to the
enactment of the public corporation ban.
The previously noted errors are further compounded because the district
court misapplied the first Arlington factor. The first factor asks whether “a
clear pattern of discrimination emerges from the effect of the state action.” All-
state, 495 F.3d at 160. The district court found that the corporation ban had
the “effect of barring nearly all out-of-state companies with the scale and ca-
pabilities necessary to serve the Texas retail liquor market.” That finding does
not answer the relevant question. For this dormant Commerce Clause inquiry,
the question is: Does the legislative action affect Walmart based on its status
as an out-of-state public corporation? See Allstate, 495 F.3d at 160–61. This
error highlights a general flaw throughout the district court’s findings.
10 The public corporation ban does have a “grandfather clause” that exempts corpora-
tions that held a P permit before the day the statute was enacted. Tex. Alco. Bev. Code. §
22.16(f). Because Texas enforced durational residency requirements for package store owners
until 2007, the exempted corporations are Texas-based firms. This clause arguably provides
some evidence of an effort by the Legislature to benefit in-state corporations, which the court
can consider along with other evidence in this case.
13
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The evidence indicates that the Legislature intended to ban public cor-
porations from obtaining P permits after the state lost its ability to enforce the
durational residency requirements for other permits. Based on the optics, the
district court made several assertions without considering a critical point: Un-
der the law of the Fifth Circuit, evidence that legislators intended to ban po-
tential permittees based on company form alone is insufficient to meet the pur-
pose element of a dormant Commerce Clause claim. See Allstate, 495 F.3d at
161–62 (rejecting Allstate’s discriminatory purpose argument because the evi-
dence indicated only a desire to treat business forms differently, without re-
gard to location); Ford Motor Co. v. Texas Dep’t of Transp., 264 F.3d 493, 500–
01 (5th Cir. 2001) (rejecting discriminatory purpose argument because “the
legislative history indicate[d] the legislature’s intent to prevent manufacturers
from utilizing their superior market position to compete against dealers in the
retail car market”); see also Exxon Corp. v. Maryland, 437 U.S. 117, 125 (1978)
(rejecting claims of disparate treatment because the statute did “not discrimi-
nate against interstate goods” or favor local companies over interstate compa-
nies). Section 22.16 bans public corporations from obtaining P permits irre-
spective of location. The ban’s effect on all public corporations provides strong
evidence that the Legislature did not purposefully discriminate against out-of-
state corporations. 11
While the district court committed several errors in finding that the Leg-
islature adopted the public corporation ban with a purpose to discriminate
against interest commerce, the record also contains circumstantial evidence
that could support such a finding. As acknowledged, Texas has a history of
11 The application of the first Arlington factor underscores why it is debatable whether
the factors should be applied in the dormant Commerce Clause context. Under Allstate, Ford,
and Exxon, a statute can create an obvious and significant barrier against out-of-state eco-
nomic actors and, nevertheless, not evidence a discriminatory purpose. Good drafting can
render the first Arlington factor hollow.
14
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discriminating against out-of-state alcohol retailers. That history has signifi-
cant “probative value in connection” with the discriminatory purpose inquiry.
Veasey, 830 F.3d at 232. However, affirming the district court’s finding of a
purpose to discriminate based on the history alone would create an odd result.
States should be able to respond to a court deeming one of its laws unconstitu-
tional. In addition, the present inquiry is further complicated because Texas
enforced durational residency requirements against would be P permit holders
for years after the public corporation ban was enacted. In this context, overre-
liance on the history alone would be a mistake. In line with Veasey, 12 and the
Supreme Court’s analysis in Perez, the history of discrimination should be
weighed “with any other direct and circumstantial evidence of th[e] Legisla-
ture’s intent.” Perez, 138 S. Ct. at 2327.
The district court committed errors in its findings with respect to the
other Arlington factors. The appropriate action is to remand the discriminatory
purpose issue for reconsideration in light of this opinion. See Veasey, 830 F.3d
at 235 (explaining that discriminatory intent is a factual matter that, when set
aside for an error of law, should be remanded for further proceedings).
C.
Moving on in the dormant Commerce Clause analysis, the district court
found that the public corporation ban does not have a discriminatory effect. 13
The district court reached that determination by following Allstate, 14 Ford, 15
12 830 F.3d at 232 (noting that “relatively contemporary examples of discrimination
identified by the district court are limited in their probative value in connection with discern-
ing the Texas Legislature’s intent”).
13 The district court also acknowledged its “odd” result, finding the public corporation
ban has a discriminatory purpose but not a discriminatory effect. As stated in Section III.B
of this opinion, that result was partially attributable to the district court’s misapplication of
the first Arlington factor. However, it also highlights the logical inconsistency that might
result from applying the Arlington factors in a dormant Commerce Clause case.
14 495 F.3d 162–63 (relying on Exxon and rejecting discriminatory effect argument).
15 264 F.3d at 500–02 (relying on Exxon and rejecting discriminatory effect argument).
15
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and Exxon. 16 Exxon is the controlling dormant Commerce Clause case for con-
sidering a facially neutral statute that bans particular companies from a retail
market. In Exxon, oil companies brought a dormant Commerce Clause chal-
lenge to invalidate a Maryland statute prohibiting producers and refiners of
petroleum products from operating retail service stations in the state. The oil
companies argued that the statute had the effect of protecting in-state inde-
pendent dealers from out-of-state competition. Exxon, 437 U.S. at 125. The
plaintiffs relied on the fact that the burden of the prohibition fell solely on in-
terstate companies. Id.
The Supreme Court rejected the argument and explained that because
“the burden of [a] state regulation falls on some interstate companies does not,
by itself, establish a claim of discrimination against interstate commerce.” Id.
at 126. The Court’s reasoning was based on the following factors: (1) The pro-
hibition did not restrict interstate dealers in the retail market; (2) did not re-
strict the flow of interstate goods; (3) did not place added costs on interstate
goods; and (4) did not distinguish between in-state and out-of-state retailers in
the market. Id. The Court declared that the absence of those factors “distin-
guishe[d] th[e] case from those in which a State has been found to have dis-
criminated against interstate commerce.” Id. A burden on some interstate com-
panies is not a violation if “in-state [retailers] will have no competitive ad-
vantage over out-of-state [retailers].” Id.
In Ford, this court considered Exxon and rejected the plaintiff’s discrim-
inatory effect argument. The case involved a Texas statute that banned auto-
mobile manufacturers from obtaining a license to become car dealers in the
state. This court explained that a statute should be examined by “its effect on
similarly situated business entities.” Ford, 264 F.3d at 501. Ford had failed to
16 437 U.S. at 125–26 (rejecting argument that statute had a discriminatory effect).
16
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show that the Texas statute in question “discriminate[d] according to the ex-
tent of a business entity’s contacts with the State. . . . [B]ut rather [showed
discrimination] on the basis of Ford’s status as an automobile manufacturer.”
Id. at 502. It was irrelevant whether Ford is domiciled in Texas or Michigan.
Id. Either way, Ford was proscribed from entering the Texas automobile retail
market. The statute, however, did not discriminate against independent auto-
mobile dealers seeking to enter the Texas market. Id. Even if the statute “pre-
vent[ed] manufacturers from utilizing their superior market position to com-
pete against dealers in the retail car market[,]” the statute did not have a dis-
criminatory effect on interstate commerce. Id. at 500. A statute can have a
discriminatory effect if it provides a “competitive advantage to in-state inter-
ests vis-à-vis similarly situated out-of-state interests.” Id. at 501 (emphasis
added).
Allstate is the most recent of the controlling cases. 17 Allstate, which con-
trolled approximately 15% of the automobile insurance market in Texas, initi-
ated a plan to enter the auto body repair business by acquiring Sterling Colli-
sion Centers, Inc. (“Sterling”). Sterling was a multi-state chain of repair shops,
including 15 shops in Texas. 495 F.3d at 155. Allstate believed it could mini-
mize expenses for unnecessary or overpriced repairs, and eventually started
funneling repair opportunities to Sterling instead of other local repair shops.
Id. Texas later passed a bill that barred insurers from acquiring an interest in
17 In Churchill Downs Inc. v. Trout, this court acknowledged that, “[i]n cases where
the challenged statutes are facially neutral, the Supreme Court has evinced a reluctance to
take an expansive view of the concept of ‘discriminatory effects.’” 589 F. App’x 233, 236 (5th
Cir. 2014). This court noted that the Court reached the conclusion in Exxon by using a narrow
definition of “substantially similarly entities.” Id. The Court has been mostly reluctant to find
that a facially neutral statute has a discriminatory effect. See id. (discussing Minnesota v.
Clover Leaf Creamery Co., 449 U.S. 456, 458 (1981), in which the court upheld a facially-
neutral statute); id. at n.7 (citing Erwin Chemerinsky, Constitutional Law 447 (4th ed. 2011)
(citing Clover Leaf as an additional example of a case where “discriminatory impact” did not
invalidate a facially neutral statute)).
17
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auto body shops. 18 Id. at 156. Allstate later filed suit, arguing in part that the
bill violated the dormant Commerce Clause. Allstate chiefly argued that the
bill was part of a coordinated political effort to hurt its Sterling venture and to
maintain the market dominance of local Texas body shops. Id. The district
court rejected the claim. Id. at 157.
On appeal, the plaintiffs argued that the bill had a discriminatory effect
because it favored in-state companies and would shift some services from out-
of-state providers to in-state providers. 495 F.3d at 162. Relying principally on
Exxon, this court rejected the discriminatory effect argument, stating that “[a]
statute impermissibly discriminates only when it discriminates between simi-
larly situated in-state and out-of-state interests.” Id. at 163.
In the present case, the public corporation ban treats in-state and out-
of-state public corporations the same. Neither in-state nor out-of-state public
corporations may obtain a P permit or own a package store. There are “no bar-
riers whatsoever to out-of-state” companies obtaining P permits so long as they
are not a public corporation as defined by the statute. Allstate, 495 F.3d at 163.
Further, § 22.16 does not “prohibit the flow of interstate [liquor retail prod-
ucts], place additional costs upon [out-of-state retailers], or distinguish be-
tween in-state and out-of-state companies in the retail market.” Id. (quotation
marks omitted). “[T]he absence of any of these factors fully distinguishes this
case from those in which a State has been found to have discriminated against
interstate commerce.” Id. (quotation marks omitted). As the district court
noted, Texas-based public corporations are prohibited from selling liquor in the
state. Meanwhile, several companies owned by out-of-state residents have en-
tered the Texas liquor retail market, including one of the ten largest liquor
18The bill also included a grandfather clause that exempted facilities already open for
business at the time. Allstate, 495 F.3d at 157 n.6.
18
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retailers in the state. 19 Despite the fact that the public corporation ban un-
doubtedly blocks some economic actors from entering the Texas liquor retail
market, 20 we agree with the district court that the ban does not have a discrim-
inatory effect on interstate commerce. 21
Because the district court committed clear error in finding that § 22.16
was enacted with a purpose to discriminate against interstate commerce, and
given that we have concluded that the facially neutral ban does not have a
discriminatory effect, we must remand this case for reconsideration of whether
the ban was enacted with a discriminatory purpose.
19 Fine Wines & Spirits of North Texas, LLC is owned by a Maryland resident.
20 See Ford, 264 F.3d at 512 (Jones, J., concurring) (concurring because Exxon is con-
trolling but noting the barrier to retail competition from out-of-state).
21 There is a tension, however, between the Court’s analysis in Exxon and dicta from
its recent opinion in Tennessee Wine. 139 S. Ct. 2449. The case involved a set of Tennessee
laws that placed durational-residency requirements on those seeking to obtain or renew a
license to operate a liquor store in the state. Id. at 2456. One of the provisions provided that
a corporation could not obtain a license to operate a liquor store unless all its stockholders
are residents of Tennessee. Id. at 2457. The Sixth Circuit had previously found that provision
facially discriminatory and affirmed that it violated the dormant Commerce Clause. Byrd v.
Tennessee Wine & Spirits Retailers Ass’n, 883 F.3d 608, 626, 628 (6th Cir.), cert. granted, 139
S. Ct. 52 (2018), and aff’d sub nom. Tennessee Wine, 139 S. Ct. 2449. The provision was not
at issue in Tennessee Wine, but the majority commented on its discriminatory nature and its
practical effect. The Court referred to the 100-percent-resident shareholder requirement as
a “blatant” violation of the Commerce Clause. Id. at 2457. The Court also noted that the
practical effect of the provision was that “no corporation whose stock is publicly traded may
operate a liquor store in the State.” Id. But the Court did not say more on that point. Con-
cluding the opinion, the majority added that “the predominant effect” of the 100-percent-
resident shareholder provision was to protect members of the Tennessee Wine and Spirits
Retailers Association from out-of-state competition. Id. at 2476. The dicta in that opinion
leaves many questions to be answered. Was the predominant effect of the provision protec-
tionism because it was facially discriminatory or because of its practical effect? The Tennes-
see laws were all facially discriminatory, so the Court never conducted a discriminatory effect
analysis. As this court has previously noted, “jurisprudence in the area of the dormant Com-
merce Clause is, quite simply, a mess.” Churchill Downs, 589 F. App’x at 235. Because of the
ambiguity in the dicta from Tennessee Wine, we decline to conclude that the Court meant to
alter the discriminatory effect analysis when specifically considering a general public corpo-
ration ban. Exxon remains the controlling Supreme Court precedent.
19
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D.
The district court analyzed another means by which it concluded could
invalidate a statute under the dormant Commerce Clause even if the statute
did not discriminate facially, in purpose or in effect. The district court con-
cluded that “a law that does not directly discriminate against interstate com-
merce” can still violate the dormant Commerce Clause if it imposes a burden
on interstate commerce that is “clearly excessive” in relation to the “putative
local benefits.” Pike v. Bruce Church, Inc., 397 U.S. 137, 142 (1970)). The dis-
trict court determined that § 22.16 violates the dormant Commerce Clause un-
der the Pike test. We conclude that remand is needed on this ground as well.
A court should consider: (1) whether the law burdens interstate com-
merce; 22 (2) whether there is a “legitimate local interest” in the law; 23 and (3)
when both are present, if the extent of the burden should be tolerated based on
the local interest involved, including if the interest “could be promoted as well
with a lesser impact on interstate activities.” 24 The inquiry is known as the
Pike balancing test. Churchill Downs, 589 F. App’x at 237. When applying the
Pike test in this context, “[a] statute imposes a burden when it inhibits the flow
of goods interstate.” Allstate, 495 F.3d 151. Having already held that the public
corporation ban was enacted with a purpose to discriminate, the district court
further concluded that “the burden imposed on [interstate] commerce” by the
public corporation ban “is clearly excessive in relation to the putative local ben-
efits.” Pike, 397 U.S. at 142.
22 Pike, 397 U.S. at 142.
23 Id.
24 Id. (emphasis added).
20
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Appellants argue that the Pike test does not apply to a nondiscriminatory
regulation of alcohol beverage retailing under the Twenty-first Amendment. 25
Walmart contends that the controlling case law is clear that Pike can be ap-
plied to alcohol-related laws despite the Twenty-first Amendment.
The Supreme Court has not considered the issue. Further, none of our
sister circuits have struck down a state regulation of liquor under Pike while
also concluding that the Twenty-first Amendment applied. See Lebamoff En-
terprises, Inc. v. Huskey, 666 F.3d 455, 467 (7th Cir. 2012) (Hamilton, J., con-
curring) (“What we do not find is a case applying Pike balancing and holding
that a non-discriminatory state alcohol law flunks.”). Compare Baude v. Heath,
538 F.3d 608 (7th Cir. 2008) (striking down statute that was discriminatory in
effect while citing Pike without addressing the Twenty-first Amendment) with
Lebamoff, 666 F.3d at 468 (Hamilton, J., concurring) (“The Baude opinion does
not, however, provide a persuasive basis for applying Pike balancing to non-
discriminatory state alcohol laws.”). Application of Pike in the face of § 2 of the
Twenty-first Amendment is questionable in light of the Court’s recent declara-
tion that states “remai[n] free to pursue” legitimate interests aimed at regu-
lating the ill-effects and risks associated with the alcohol trade. Tennessee
Wine, 139 S. Ct. at 2472 (alteration in original) (quotation marks omitted). 26
25 The TPSA asserts that Walmart failed to litigate Pike in the district court. However,
Pike was either cited or raised by the parties numerous times during the district court pro-
ceedings. Walmart did not waive the Pike issue.
26 This is also true in light of the Court’s acknowledgement that three-tier systems for
the control and distribution of alcohol are “unquestionably legitimate.” Granholm, 544 U.S.
at 488–89 (quotation marks omitted). Various nondiscriminatory laws passed under three-
tier systems place at least some burden on interstate commerce. Pike balancing might be
decisive in many cases. See Lebamoff, 666 F.3d at 469 (Hamilton, J., concurring). Granting
courts the power to substitute a legislature’s policy considerations with its own when consid-
ering nondiscriminatory alcohol-related laws seems to be in direct tension with state power
granted by § 2. Such tension lends support for Justice Scalia’s contention that the Pike “in-
quiry is ill suited to the judicial function and should be undertaken rarely if at all.” CTS Corp.
v. Dynamics Corp. of Am., 481 U.S. 69, 95 (1987) (concurring).
21
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However, in Tennessee Wine, the Court “reiterate[d] that the Commerce
Clause by its own force restricts state protectionism.” 139 S. Ct. at 2461 (em-
phasis added). While that is an ambiguous statement from a case involving a
facially discriminatory provision, it is a signal that we need not get ahead of
the Court by concluding that Pike balancing cannot be applied to a facially
neutral regulation of alcohol retailing. 27 So we proceed with the test.
The inquiry ends at our first step in the analysis. The district court de-
termined that the public corporation ban places a substantial burden on inter-
state commerce because it protects package stores owned by Texas residents
from out-of-state market entrants. The district court relied on evidence that
98% of the package stores in Texas are owned by in-state residents. Addition-
ally, Walmart provided evidence that numerous out-of-state companies would
enter the Texas liquor retail market if the ban was not in place. Appellants
argued that the ban places an equal burden on in-state companies, presenting
evidence that the number of publicly traded companies domiciled in Texas that
are barred by the ban is roughly proportional to Texas’ share of the national
population and national economy. The district court rejected appellants’ evi-
dence and declared that “assessing disparate impact requires the Court to
measure the effect the public corporation ban has on the in-state and out-of-
state companies that would otherwise serve the market if not for the ban.”
There is no authority which supports that conclusion.
The district court’s analysis overlooks the controlling precedent. In
Exxon, the Court instructed that the Commerce “Clause protects the interstate
27 The Court has cited Pike in dormant Commerce Clause cases involving alcohol-re-
lated laws. See Brown-Forman Distillers Corp. v. New York State Liquor Auth., 476 U.S. 573,
579 (1986) (evaluating the constitutionality of state’s lowest-price affirmation provision of
alcohol control law); Bacchus Imports, Ltd. v. Dias, 468 U.S. 263, 270 (1984) (considering the
constitutionality of a liquor excise tax). In the absence of controlling authority, we will not
exempt an entire category of laws from the Pike test.
22
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market, not particular interstate firms.” Exxon, 437 U.S. at 128 (emphases
added). The Court explained that interstate commerce is not “subjected to an
impermissible burden” because some potential participants are shifted out of
the in-state market. Id. at 127. 28 As noted in Allstate, “[t]he Supreme Court
has ‘rejected the notion that the Commerce Clause protects the particular
structure or methods of operation in a . . . market.’” Allstate, 495 F.3d at 163–
64 (quoting CTS Corp., 481 U.S. at 93–94). In that case, this court rejected the
assertion that there was a substantial burden on interstate commerce, in part
because the Texas law in question did not prohibit interstate economic actors
from entering the in-state market. Id. at 164 (rejecting assertion that a com-
pany’s inability to expand imposes a burden on interstate commerce). Similar
to Allstate, appellants in the present case have provided evidence that several
package stores in Texas are owned and operated by out-of-state residents. See
id. (finding the same).
The district court should have considered evidence addressing the public
corporation ban’s effect on the flow of interstate goods, or how the ban affects
the flow of the potential market participant’s goods to the Texas liquor retail
market. See id. at 163 (“A statute imposes a burden when it inhibits the flow
of goods interstate.”); Ford, 264 F.3d at 503 (finding the plaintiff “failed to
demonstrate that [the statute] will burden commerce by inhibiting the flow of
interstate goods”); see also Exxon, 437 U.S. at 126 n.16 (“If the effect of a state
28 Walmart incorrectly asserts that Lewis v. BT Inv. Managers, Inc., informs the Pike
inquiry in this case. 447 U.S. 27 (1980). The Court made it clear that the prohibition in that
case discriminated among similarly situated business entities according to their contact with
the local state economy. See id. at 42 (“It follows that [the statue] discriminates among af-
fected business entities according to the extent of their contacts with the local economy. The
absence of a similar discrimination between interstate and local producer-refiners was a most
critical factor in Exxon.”) (emphasis in original). The Court determined that the statute had
a discriminatory effect but concluded that it failed the Pike test. Id. Again, Exxon, Ford, and
Allstate are controlling in this case.
23
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regulation is to cause local goods to constitute a larger share, and goods with
an out-of-state source to constitute a smaller share, of the total sales in the
market . . . the regulation may have a discriminatory effect on interstate com-
merce.”). The record is devoid of such evidence. Therefore, a remand is neces-
sary to allow the trial court to find facts for proper application of the Pike test. 29
We vacate the portion of the district court’s judgment that the public
corporation ban violates the dormant Commerce Clause because remand is
warranted on two separate grounds.
E.
The district court also determined that the public corporation ban does
not violate the Equal Protection Clause because the ban is rationally related
to the state’s legitimate purpose of reducing the availability and consumption
of liquor throughout Texas. Walmart argues that (1) heightened scrutiny
should apply to the ban because the law imposes an “absolute deprivation” of
a benefit due to the applicant’s supposed wealth; and (2) the ban has the hall-
marks of “animus” against public corporations. Walmart adds that the ban is
also irrational. Appellants argue that the public corporation ban is an economic
regulation that is not subject to heightened review and clearly survives ra-
tional basis review. We agree with the latter.
Under the Equal Protection Clause of the Fourteenth Amendment, “[n]o
State shall . . . deny to any person within its jurisdiction the equal protection
of the laws.” U.S. Const. amend. XIV, § 1. Walmart has failed to provide sup-
port for its assertion that a general ban on public corporations warrants height-
ened scrutiny. 30 Walmart is not a member of a protected class and the public
29 The district court also found that the public corporation ban is rationally related to
a legitimate state interest. However, because there is not a sufficient factual record to weigh
against the state interest, we do not consider the issue at this time. A remand is warranted.
30 Walmart’s contention, that the ban was enacted with animus toward public corpo-
rations generally and animus toward Walmart specifically, may be true. However, Walmart
24
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corporation ban does not infringe upon a fundamental right. Therefore, we ap-
ply a rational basis review. Hines v. Alldredge, 783 F.3d 197, 202–03 (5th Cir.
2015). “Under this standard, a legislative classification ‘must be upheld
against equal protection challenge if there is any reasonably conceivable state
of facts that could provide a rational basis for the classification.’” Glass v. Pax-
ton, 900 F.3d 233, 244–45 (5th Cir. 2018) (quoting FCC v. Beach Commc’ns,
Inc., 508 U.S. 307, 313 (1993)). The parties challenging the “presumption of
validity” granted to legislative classifications must negate every conceivable
basis which might support the legislation. Id. at 245.
Rational basis review is fact intensive. The review “places no affirmative
evidentiary burden on the government, [but] plaintiffs may nonetheless negate
a seemingly plausible basis for the law by adducing evidence of irrationality.”
St. Joseph Abbey v. Castille, 712 F.3d 215, 223 (5th Cir. 2013). While a “hypo-
thetical rationale” is acceptable, it “cannot be fantasy.” Id. The government
action “must rationally relate to the state interests it articulates.” Id. “[W]e
will examine the State[’s] rationale informed by the setting and history of the
challenged rule.” Id.
The district court determined that the public corporation ban is conceiv-
ably related to Texas’ legitimate purpose to reduce the availability and con-
sumption of liquor. On appeal, Walmart contends that this conclusion was
made up of “hypothetical . . . lawful links.” Walmart adds that allowing the ban
would “justify banning any group the Legislature might conceivably believe
has failed to provide a single case indicating that heightened scrutiny should be applied to
such an Equal Protection Claim. Walmart cites Bishop v. Smith. 760 F.3d 1070, 1099–1100
(10th Cir. 2014) (Holmes, J., concurring). However, Bishop did not involve an application of
heightened scrutiny based on animus toward corporations. Walmart has also failed to provide
support for its contention that a corporation’s perceived wealth warrants inclusion in a pro-
tected class.
25
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would be more successful at retail” and the hypothetical is “contrary to basic
economic truth.” Walmart’s pleas are unavailing.
Walmart does not dispute that Texas has a legitimate interest in regu-
lating the consumption of liquor and limiting the effects of liquor-related ex-
ternalities. The state could believe that excluding public corporations reduces
both the total number of package store firms and overall liquor consumption,
driving up prices. Relatedly, it is more than reasonable to assume that the
state believed that public corporations have the capital and scale to offer liquor
well below current prices. In fact, that assumption was included in Walmart’s
argument that the public corporation ban keeps liquor prices “artificially high”
and forces consumers to pay “non-competitive prices.” Walmart’s own argu-
ments support the district court’s conclusion. Walmart has not negated the
theory that excluding public corporations from the liquor retail market in-
creases prices. We conclude that there is a rational basis for Texas’ decision to
ban all public corporations from obtaining P permits. The public corporation
ban does not violate the Equal Protection Clause.
F.
While this appeal was pending, the governor of Texas signed into law
House Bill 1545. Section 82 of the bill raises the five P permit limit created by
Tex. Alco. Bev. Code § 22.04, to 250 P permits. A permittee may obtain up to
15 original P permits each year, and an unlimited number of permits pur-
chased from already-existing stores. Section 85 of the bill repeals Tex. Alco.
Bev. Code § 22.05, the consanguinity exception to the five-permit limit. The bill
takes effect on September 1, 2019. Tex. H.B. 1545, §§ 82, 84. Walmart now
seeks to withdraw its challenges to §§ 22.04 and 22.05, and has requested that
we vacate the district court’s judgment in its favor with respect to those chal-
lenges. The parties agree that we should vacate the district court’s judgment
26
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in Walmart’s favor with respect to those challenges. 31 Accordingly, we do not
address Walmart’s challenges to §§ 22.04 and 22.05. The challenges are with-
drawn. Remand is warranted in this case, and we leave for the district court to
consider in the first instance whether the judgment in favor of Walmart with
respect to §§ 22.04 and 22.05 should be vacated.
IV. Conclusion
For the reasons stated above, the district court’s judgment enjoining en-
forcement of § 22.16 is VACATED. The district court’s judgment that § 22.16
does not violate the Equal Protection Clause is AFFIRMED. The district court’s
judgment that § 22.16 offends the dormant Commerce Clause is VACATED
and REMANDED for further proceedings consistent with this opinion.
31 Walmart did not file a motion but made its request in a Federal Rule of Appellate
Procedure 28(j) letter submitted to this court on June 17, 2019. On June 19, 2019, the TPSA
submitted a response to the 28(j) letter agreeing with Walmart. The TABC submitted a re-
sponse on June 20, 2019, agreeing that the district court’s judgment should be vacated.
27