Tag: marijuana business

Few things are more difficult to eradicate in our system of modern governance than a government-sanctioned monopoly or oligopoly. A recently passed bill in Tennessee, which will allow the state’s alcohol wholesalers to take over hemp distribution in the state, shows that these monopolies are not only difficult to eliminate but also often attempt to expand their reach.    

The new law sets up a distribution system for hemp—which was legalized at the federal level in the 2018 Farm Bill—that mirrors the notorious three-tier system for alcohol distribution, which requires producers, wholesalers, and retailers to be legally separate entities. The three-tier system restricts producers and suppliers from selling directly to their customers and mandates that they work through a wholesaler to reach the market. This allows wholesalers to operate as functional monopolies or oligopolies in certain parts of states where only one or two wholesalers operate.

The law, which takes effect on January 1, 2026, also requires all wholesalers and retailers of hemp products to maintain a physical presence within the state. Out-of-state hemp suppliers will be prohibited from engaging in direct-to-consumer shipping to customers in Tennessee, and instead will be forced to work through the state’s wholesaler and retailer tiers. While in-state Tennessee hemp suppliers cannot ship their products to Tennesseans either, they are able to sell on-site directly to their customers, providing a workaround to avoid the three-tier system.

Cornbread Hemp, a Kentucky hemp supplier that recorded $1 million in Tennessee-based sales last year, is challenging the new law in federal court. Cornbread Hemp argues that Tennessee’s law unconstitutionally discriminates against out-of-state competitors in favor of in-state businesses, which is a violation of the Constitution’s Dormant Commerce Clause.

Supreme Court observers will recognize how closely the case mirrors Tennessee Wine and Spirits Retailers Association v. Thomas (2019). In the case, the majority struck down Tennessee’s requirement that applicants for alcohol wholesaling or retailing licenses must have resided in the state for over two years, finding it to be unconstitutional discrimination against out-of-state economic interests.

Tennessee’s constitutional rationale for residency requirements in the hemp context is even weaker than with alcohol. The main constitutional defense in support of residency requirements for alcohol is that the 21st Amendment, which repealed Prohibition, devolved alcohol regulation back down to the state and local level. States, therefore, argue that the Constitution’s recognition of state power in the alcohol arena should inoculate residency clauses from Dormant Commerce Clause challenges. While some lower courts have continued to buy this argument, the Supreme Court has refused to go along in recent decades.

As liquor attorney Sean O’Leary notes, the 21st Amendment allows a discriminatory state law in the alcohol context to face a lower level of constitutional scrutiny than a non-alcohol law. The argument essentially boils down to: Alcohol is uniquely treated under the U.S. Constitution. Hemp has no corollary to the 21st Amendment, meaning a discriminatory hemp law will face a higher level of constitutional scrutiny.

Now alcohol wholesalers—already a government-sanctioned oligopoly or monopoly in many locales—are trying to expand their control beyond alcohol. The new law makes this power grab particularly blatant, since it moves hemp from under the purview of the Tennessee Department of Agriculture to the state Alcoholic Beverage Commission.

In fact, this change was made “at the behest of the wholesaler lobby,” O’Leary notes. “The wholesaler’s goal is to mandate a three-tier system where they get a piece of the action.” He predicts that, given the power of the alcohol wholesaler lobby in state capitals across America, more state legislatures will be following Tennessee’s lead.