In an opinion that will likely not stand for long, the U.S. District Court for the Eastern District of Washington in Shady Knoll Orchards & Distillery v. Vollendroff handed down a ruling (link to opinion) denying dormant Commerce Clause claims that bear a striking resemblance to the facts and issue under the Supreme Court’s decision in Granholm v. Heald, but decided to rely on the recent Day v. Henry decision instead. The court’s effort to cabin the Supreme Court’s Granholm v. Heald decision into irrelevance does not withstand scrutiny—especially as the Ninth Circuit is potentially poised to rehear Day v. Henry en banc and, in all likelihood, reverse the panel’s finding of no discrimination.
The Facts
Shady Knoll Orchards & Distillery, a New York-based craft distiller, sought to sell and ship its products directly to consumers in Washington. Like many small producers across the country, Shady Knoll operates an e-commerce platform and already sells to customers in other states. But Washington law requires any distillery that wishes to sell directly to consumers to hold a state license—one which can only be obtained if the distillery has a physical presence in Washington.
Shady Knoll and two Washington consumers challenged this requirement under the dormant Commerce Clause, arguing that it effectively discriminates against out-of-state businesses. The court, however, sided with the state, granting summary judgment to the Washington Liquor and Cannabis Board on April 17, 2025.
The Court’s Reasoning: A Familiar Misstep
The court relied heavily on the Ninth Circuit’s decision in Day v. Henry, which upheld a similar physical presence requirement in Arizona for an in-state vs. out-of-state privilege in shipping granted to the retailer tier of the three-tiered system. The Court here held that like Washington’s grant of retailer privileges to manufacturers makes this case a comparator to the Day v. Henry decision which involved Arizona’s operation of a three-tier system and limits on shipping privileges to licensed, in-state retailers. The district court here, parallelling the retailer reasoning in Day v. Henry, found that because the physical presence requirement applies to all distillers—regardless of origin—it is facially neutral and thus non-discriminatory under the first step of the Tennessee Wine dormant Commerce Clause analysis.
But as we’ve previously written in our Day v. Henry coverage, this reasoning ignores the central holding of Granholm v. Heald, 544 U.S. 460 (2005). Granholm made clear that states may not use the structure of the three-tier system as a fig leaf for protectionism. While Granholm repeated the dicta regarding the validity of the three-tiered system that has become the “let the end be legitimate” of 21st Amendment related dormant Commerce Clause jurisprudence in validating the system itself, it explicitly condemned state exceptions to that structure which treat in-state and out-of-state entities differently. The physical presence requirement—no matter how formally neutral—functions as exactly that sort of exception when paired with rights granted to in-state entities and not out-of-state entities.
The court in Shady Knoll attempts to distinguish the case from Granholm by pointing to the absence of an explicit statutory carve-out favoring in-state entities. But this ignores the functional reality: Washington distilleries can access direct-to-consumer shipping, while out-of-state distilleries cannot—unless they establish in-state facilities, which is precisely the kind of barrier the Supreme Court deemed unconstitutional in Granholm.
What the Court Missed
Here’s the crux: the court’s reasoning in Shady Knoll hinges on a formalist interpretation of the three-tier system rather than its actual application. But Granholm, Tennessee Wine, and subsequent decisions teach us to look beyond form to the practical effect of the law. And the practical effect here is unambiguous: out-of-state distillers are shut out of a direct-to-consumer sales channel that in-state distillers enjoy.
As we noted in our earlier piece on Day v. Henry, the Ninth Circuit’s narrow approach is under significant pressure. The en banc petition in Day specifically challenges the court’s dismissal of discriminatory effect and the erroneous interpretation of Granholm. The Ninth Circuit will likely correct course—and when it does, Shady Knoll will become a casualty of that same correction.
Looking Ahead
There’s a reason so many federal courts have recognized that “exceptions to the three-tier system” are the real battleground in alcohol shipping cases. The physical presence requirement, especially where tied to retail-style privileges like direct shipping, is exactly the kind of exception Granholm prohibits. The district court’s attempt to sideline Granholm by invoking Day’s flawed logic won’t stand up on appeal.
Washington’s licensing scheme for spirits manufacturers is not materially different from the Granholm-analyzed licensing scheme for wine manufacturers, and both schemes function(ed) to block out-of-state competition in violation of the dormant Commerce Clause. As we’ve said before: you cannot parse Day v. Henry and similar cases into a non-discriminatory framework without disregarding the heart of Granholm, Tennessee Wine and the developing Circuit cases that involve these matters. The court here did just that. The fight and wins occurring in favor of three-tier are in the health and safety second prong of the Tennessee Wine test and cases like this one claiming that an in-state presence requirement does not discriminate are silly and create more work down the line as the doctrine is getting developed.
We’ll continue to follow this case as it moves up to the Ninth Circuit—and we fully expect a reversal consistent with the principles reaffirmed in Granholm and Tennessee Wine.
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