Essential Features of the Three-Tier System: Third Circuit Replaces Freeman with Tennessee Wine’s Test and Upholds New Jersey’s Retailer Physical Presence and In-State Wholesaler Requirements

Introduction

In Jean-Paul Weg LLC v. Director of the New Jersey Division of Alcoholic Beverage Control, the United States Court of Appeals for the Third Circuit (precedential opinion, Apr. 2, 2025) addressed a recurring constitutional question at the intersection of the dormant Commerce Clause and the Twenty-first Amendment: may a state require out-of-state wine retailers to establish an in-state physical presence and source inventory from in-state wholesalers as a condition of shipping wine directly to state residents?

The appellants—a New York wine retailer, The Wine Cellarage, and its owner—challenged New Jersey’s two requirements: (1) a “physical presence” requirement limiting direct-to-consumer shipping privileges to retailers holding a New Jersey plenary retail license for a New Jersey premises; and (2) a “wholesaler purchase” requirement compelling New Jersey retailers to purchase inventory from New Jersey-licensed manufacturers or wholesalers. Appellants argued that these measures discriminate against interstate commerce in violation of the dormant Commerce Clause. New Jersey, invoking its authority under Section 2 of the Twenty-first Amendment and its three-tier regulatory structure, defended the rules as necessary for public health and safety and as core features of the state’s alcohol distribution system.

The panel affirmed summary judgment for the State and intervenor-defendants. In doing so, it adopted, for the Third Circuit, the Supreme Court’s “different inquiry” framework from Tennessee Wine & Spirits Retailers Association v. Thomas, thereby displacing the Circuit’s pre–Tennessee Wine approach in Freeman v. Corzine. The court held that although New Jersey’s rules are discriminatory in effect, they are justified on legitimate nonprotectionist grounds supported by concrete evidence and are essential features of the “unquestionably legitimate” three-tier system.

Summary of the Opinion

• Standard: The court explicitly embraced Tennessee Wine’s “different inquiry” for alcohol regulations, replacing the Freeman heightened-scrutiny framework. Courts must (1) determine if the regulation discriminates against nonresidents; and (2) assess whether it is justified as a public health or safety measure or on another legitimate nonprotectionist ground, supported by evidence rather than speculation.
• Discrimination: New Jersey’s physical presence requirement and wholesaler purchase requirement discriminate in effect against out-of-state retailers by imposing heightened costs on existing out-of-state businesses (new storefront, reconfigured sourcing), even though facially applied to all.
• Justification: The State’s evidence (declarations from a deputy attorney general and senior executives of two wholesalers) showed concrete, non-speculative public health and safety benefits:
  • Efficient product tracing and recalls through the in-state wholesaler channel.
  • Effective enforcement via in-person inspections and investigations, including 611 referrals for prosecution in 2020, which revealed regulatory violations such as undisclosed interests, false records, and fraudulent products.
  • Practical enforcement jurisdiction limits: New Jersey cannot conduct warrantless searches outside the state and has, at times, been unable to secure cooperation from New York’s regulator.
• Three-Tier System: The court independently upheld the requirements as “essential features” of New Jersey’s three-tier system, reasoning that if the model is “unquestionably legitimate,” its core defining features—ensuring all alcohol passes through in-state wholesalers and keeping retailers within in-state enforcement reach—are likewise legitimate.
• Alternatives: The court noted that nondiscriminatory alternatives play a reduced role under Tennessee Wine’s framework, and in any event, appellants’ proposed out-of-state permitting regime would not solve New Jersey’s enforcement limits beyond its borders.
• Holding: The Third Circuit affirmed summary judgment for the State and intervenors; New Jersey may require a physical in-state retail presence and in-state wholesaler sourcing as conditions for retailer direct shipping to consumers.

Analysis

Precedents Cited and Their Influence

• Granholm v. Heald, 544 U.S. 460 (2005)
  • Granholm held that the Twenty-first Amendment does not allow states to discriminate in favor of in-state alcohol producers, striking down laws that permitted only in-state wineries to ship directly to consumers.
  • Granholm reaffirmed two touchstones now central to this case: (a) the three-tier distribution system is “unquestionably legitimate,” and (b) state alcohol laws remain constrained by the nondiscrimination principle of the Commerce Clause.
  • Granholm rejected a state’s attempt to justify discriminatory laws with speculative assertions about minors and tax collection when nondiscriminatory mechanisms could achieve those aims.
  • Influence here: The Third Circuit distinguished New Jersey’s rules from Granholm because NJ’s measures are broad, non-loophole features of a comprehensive regulatory structure backed by concrete evidence, not carve-outs for local producers.
• Tennessee Wine & Spirits Retailers Ass’n v. Thomas, 588 U.S. 504 (2019)
  • Tennessee Wine articulated a “different inquiry” for alcohol cases: after identifying discrimination, courts ask if the regulation is justified as a public health or safety measure or other legitimate nonprotectionist purpose, supported by evidence—not speculation.
  • The Court clarified that not every discriminatory feature within a three-tier system is automatically blessed by Section 2; but it reiterated the legitimacy of the three-tier model and emphasized evidence-based justification.
  • Influence here: The Third Circuit adopted Tennessee Wine’s test, displacing its earlier Freeman framework. It then upheld New Jersey’s rules because they are justified by concrete enforcement and public health benefits and represent essential features of the three-tier model.
• North Dakota v. United States, 495 U.S. 423 (1990)
  • As cited in Granholm, North Dakota undergirds the “unquestionably legitimate” label for three-tier systems and approves robust state regulatory control over alcohol distribution within state borders.
  • Influence here: The Third Circuit leaned on this lineage to ground the essential-features rationale for New Jersey’s physical presence and in-state wholesaler requirements.
• Freeman v. Corzine, 629 F.3d 146 (3d Cir. 2010)
  • Freeman, decided pre–Tennessee Wine, applied a heightened-scrutiny style inquiry that asked whether discriminatory alcohol regulations served local purposes not as well served by nondiscriminatory means.
  • Influence here: The district court used Freeman; the Third Circuit held that Tennessee Wine “compels” using a different standard, thereby superseding Freeman to the extent inconsistent. This is a notable doctrinal shift in the Third Circuit.
• Other supporting authorities
  • Dep’t of Revenue v. Davis, 553 U.S. 328 (2008): dormant Commerce Clause backdrop; the court referenced the baseline tool but shifted to Tennessee Wine’s tailored test for alcohol cases.
  • Oregon Waste Systems, Inc. v. Dep’t of Environmental Quality, 511 U.S. 93 (1994); New Energy Co. v. Limbach, 486 U.S. 269 (1988): underscore the discriminatory-law framework in typical dormant Commerce Clause cases, used in Granholm but here modified by Tennessee Wine.
  • Halliburton Oil Well Cementing Co. v. Reily, 373 U.S. 64 (1963): supplies the anti-residency principle used in Granholm; the Third Circuit invoked the added cost-burden logic in finding discriminatory effect.
  • Post-Granholm circuit cases: Sarasota Wine Market, LLC v. Schmitt, 987 F.3d 1171 (8th Cir. 2021); B-21 Wines, Inc. v. Bauer, 36 F.4th 214 (4th Cir. 2022); Lebamoff Enterprises Inc. v. Whitmer, 956 F.3d 863 (6th Cir. 2020). These cases collectively endorse states’ authority to uphold three-tier structures and to restrict out-of-state retailer direct shipments; B-21 Wines also minimized the role of nondiscriminatory alternatives under Tennessee Wine—a point the Third Circuit embraced.

Legal Reasoning

• Jurisdiction and Standard of Review
  • Jurisdiction was proper under 28 U.S.C. § 1291. The panel reviewed summary judgment de novo, applying Rule 56(a)’s no-genuine-issue standard.
  • The appellants abandoned their Privileges and Immunities claim and pursued only the dormant Commerce Clause challenge.
• Step One: Discrimination
  • Although New Jersey’s rules are facially even-handed (they apply the same licensing and sourcing restrictions to any retailer operating in New Jersey), the court found them discriminatory in effect. The reasoning parallels Granholm: requiring an out-of-state firm to incur the expense of opening a New Jersey location and reshaping sourcing practices imposes asymmetric costs on existing out-of-state retailers that in-state operators, as a class, do not bear to the same degree.
  • The court rejected the State’s contention that equal access to licensing cures discrimination. As in Granholm, a formal opportunity to obtain a license does not negate substantial, differential burdens that force out-of-state retailers to become in-state residents in all but name.
• Step Two: Justification on Legitimate Nonprotectionist Grounds
  • Public health and safety justifications were supported by concrete evidence:
    • Product tracing and recalls: Because all wine destined for New Jersey consumers must pass through licensed in-state wholesalers, the State can promptly trace contamination or tampering to its source and segregate suspect lots. The Sansone and Harmelin declarations provided specific recall experiences showing the system’s efficacy.
    • Enforcement efficacy: The physical presence requirement enables unannounced inspections and robust investigative activity, producing hundreds of prosecutions in a single year and uncovering serious regulatory violations including fraudulent product sales.
    • Jurisdictional constraints: New Jersey lacks authority to conduct warrantless searches beyond its borders and cannot rely with certainty on out-of-state agencies’ cooperation. The record cited instances where the New York State Liquor Authority declined to assist.
  • These evidentiary showings met Tennessee Wine’s demand for “concrete evidence” rather than “mere speculation.” They also distinguish Granholm, where the proffered rationales (keeping alcohol from minors and tax collection) were found to be pretextual and unsupported.
  • Nondiscriminatory alternatives: The court agreed with the Fourth Circuit that under Tennessee Wine, the availability of hypothetical nondiscriminatory alternatives is less central than in ordinary dormant Commerce Clause cases. Even if considered, an out-of-state licensing regime would not overcome New Jersey’s enforcement shortfalls beyond its jurisdiction.
• Independent Ground: Essential Features of the Three-Tier System
  • Beyond public health and safety, the court upheld New Jersey’s rules as essential features of the three-tier system—specifically, the requirement that retail sales occur within the state’s regulatory tiers and the mechanism that keeps retailers within in-state enforcement reach.
  • The opinion reasoned that if the three-tier model is constitutional, then the core features that define and sustain it are likewise constitutional. Allowing out-of-state retailers to ship directly from outside the system would create a regulatory hole, undermining the separation of tiers and the state’s capacity to control products reaching consumers—an analysis aligned with B-21 Wines (4th Cir.) and Lebamoff (6th Cir.).
  • The court rejected the argument that New Jersey “abandoned” its three-tier structure by allowing limited direct-to-consumer winery shipments. The winery exception is narrow, available to both in-state and out-of-state producers under license, and does not eliminate the three-tier framework governing retail sales.

Impact

• Doctrinal Clarification in the Third Circuit
  • The decision squarely installs Tennessee Wine’s “different inquiry” as the controlling standard for alcohol-related Commerce Clause challenges in the Third Circuit, replacing the Freeman approach to the extent of any inconsistency.
  • Litigants must now present a robust evidentiary record on public health and safety justifications; states cannot rely on speculation, but where concrete enforcement and traceability benefits are shown, even discriminatory-in-effect measures may be upheld.
• Validation of Core Three-Tier Features for Retailers
  • States within the Third Circuit can rely on this precedent to defend retailer physical presence and in-state wholesaler sourcing requirements—particularly where they demonstrate that such requirements are essential to enforcement, inspection, product tracing, and consumer protection.
  • The opinion situates the Third Circuit alongside the Fourth and Sixth Circuits in upholding restrictions on out-of-state retailer direct shipping, reinforcing a growing consensus that such restrictions can be constitutional when integrated into a functioning three-tier system and supported by evidence.
• E-Commerce and Out-of-State Retailers
  • Online wine retailers seeking to ship into New Jersey must either establish a New Jersey retail location and source from in-state wholesalers or forego direct-to-consumer shipments into the state. A simple “ship-from-out-of-state” permit scheme is insufficient absent a credible enforcement mechanism that addresses New Jersey’s jurisdictional limits.
  • Retailers should anticipate more aggressive use of in-state inspection, recordkeeping, and wholesaler-based traceability controls, and they should design compliance programs that can withstand unannounced inspections and audits.
• Legislative and Regulatory Strategy
  • States contemplating reforms should:
    • Document concrete enforcement and public health benefits of any discriminatory-in-effect measures.
    • Articulate how each requirement preserves the integrity of the three-tier structure and enhances traceability and safety.
    • Consider cooperative enforcement compacts with neighboring jurisdictions if relying on out-of-state licensing is contemplated—though the opinion underscores the fragility of cross-border cooperation.
  • The opinion also signals that narrow exceptions (e.g., winery direct shipping available to in- and out-of-state producers) need not dismantle the core three-tier model governing retail sales.
• Prospects for Supreme Court Review
  • Because the decision follows Tennessee Wine and echoes the reasoning in the Fourth and Sixth Circuits, the likelihood of certiorari based on a circuit conflict appears modest. However, nuances remain among circuits regarding whether certain requirements are “nondiscriminatory” versus “discriminatory but justified.” If divergent characterizations grow consequential, further High Court guidance could be sought.

Complex Concepts Simplified

• Dormant Commerce Clause: Even when Congress has not legislated, the Commerce Clause is read to bar states from protectionist laws that discriminate against or unduly burden interstate commerce.
• Twenty-first Amendment, Section 2: Gives states authority to control the importation and distribution of alcohol within their borders. This power does not erase other constitutional limits, but it adjusts the dormant Commerce Clause inquiry for alcohol.
• Three-Tier System: A regulatory model separating producers, wholesalers, and retailers. Most states require alcohol to move from producer to in-state wholesaler to in-state retailer before reaching consumers, with licensing and inspections at each tier.
• Discrimination (Facial vs. Effect): A law is facially discriminatory if it expressly favors in-state interests. A law may be discriminatory in effect if, despite neutral language, it imposes greater burdens on out-of-state businesses (e.g., forcing them to open in-state facilities).
• “Different Inquiry” (Tennessee Wine): For alcohol, after finding discrimination, courts ask whether the law is justified by public health/safety or another nonprotectionist rationale, supported by concrete evidence, not mere assertions.
• Essential Features of the Three-Tier System: Requirements that define and sustain the three-tier model—such as ensuring products pass through in-state wholesalers and keeping retailers within in-state enforcement reach—are generally legitimate if tied to public health and safety.
• Summary Judgment (Rule 56): A case is resolved without trial when there is no genuine dispute of material fact and the movant is entitled to judgment as a matter of law; appellate review is de novo.

Conclusion

Jean-Paul Weg LLC cements two important propositions in the Third Circuit’s alcohol jurisprudence. First, Tennessee Wine’s “different inquiry” governs dormant Commerce Clause challenges to state alcohol regulations, supplanting Freeman’s pre–Tennessee Wine framework. Plaintiffs must show discrimination, and states must then carry the burden to justify the measure with concrete, nonprotectionist evidence tied to public health and safety or other legitimate interests.

Second, New Jersey’s physical presence and in-state wholesaler purchase requirements survive that test. The court credited evidence that these measures enable effective inspections, investigations, and product tracing and that extraterritorial enforcement is practically unavailable. Independently, the court recognized these requirements as essential features of the “unquestionably legitimate” three-tier system. In short, while states cannot adopt protectionist exceptions like those invalidated in Granholm, they can, with adequate evidentiary support, insist on the structural elements that make the three-tier system function.

For regulators, the lesson is evidentiary: build records showing how specific requirements concretely advance traceability and enforcement. For retailers, the takeaway is strategic and compliance-oriented: to access direct-to-consumer channels in jurisdictions like New Jersey, expect to meet in-state presence and sourcing obligations integral to the three-tier model. And for the law, the opinion harmonizes the Third Circuit with post–Tennessee Wine authority, clarifying that the Constitution permits state alcohol regimes to protect public health and safety through the essential architecture of the three-tier system—even where such measures impose differential burdens on out-of-state market actors.