Why This Federal Lawsuit Could Upend How Liquor Is Shipped Across State Lines

A Los Angeles craft distillery is challenging the New York State Liquor Authority in federal court. And it’s a case that could have broader implications for alcohol distribution in the United States.

The case is titled The Obscure Distillery v. Lily M. Fan. The Obscure Distillery is a California craft distiller of spirits, including a rye whiskey made with American chestnut tree trimmings sourced from New York. Lily M. Fan, the chair of the New York State Liquor Authority since 2023, is being sued in her official capacity with the State Liquor Authority.

The Obscure Distillery’s filing alleges “a discriminatory burden on interstate commerce that prevents out-of-state distilleries from competing in New York on equal terms with in-state distilleries.” 

Since the repeal of Prohibition in 1933, liquor distribution in the United States has primarily followed what is commonly referred to as a “three-tier system.” Under this structure, manufacturers and importers must sell their products to wholesale distributors, who then sell to consumer-facing retailers like liquor stores and bars. Regulations vary by state and sometimes by county. In 17 states, including Michigan, New Hampshire, Oregon, and Pennsylvania, the state government controls the wholesale or retail distribution of alcohol. New York is not one of these states, meaning wholesale and retail distribution is handled by private entities. 

As craft distilling has grown exponentially over the past 20 years — from dozens of producers in the mid-2000s to nearly 3,000 today — some jurisdictions have begun changing laws to allow for more direct-to-consumer sales. This includes regulations related to liquor e-commerce, as well as direct sales at distillery gift shops and tasting rooms.

The Obscure Distillery’s filing highlights restrictions on which out-of-state distilleries can and cannot ship to consumers in New York. In August 2024, New York Governor Kathy Hochul signed Senate Bill S2852A, expanding the capacity of the state’s small spirits, cider, and mead producers to ship directly to consumers. The law also outlines restrictions on certain out-of-state retailers, preventing them from shipping directly to New York residents.

Specifically, the new law “authorizes the direct interstate shipment of up to thirty-six cases of liquor per year to a New York resident, who is at least twenty-one years of age, by a licensed manufacturer with the privilege of producing liquor that is: (1) equivalent in class and/or annual production capacity to the NYS manufacturers authorized to make direct liquor shipments; and (2) from a state that affords reciprocal shipping abilities to similarly licensed NYS manufacturers.”

In its filing on April 16, 2025, The Obscure Distillery alleges that because California and New York do not share shipping reciprocity, it cannot obtain an “out-of-state direct shipper’s license.” The filing argues that this prevents it and similar businesses from facing an unconstitutional ban on interstate commerce.

“Laws that treat businesses differently based on location are discriminatory and unconstitutional,” said Jeff Jennings, attorney for Pacific Legal Foundation, which is representing The Obscure Distillery at no charge. “By allowing in-state distilleries privileges that out-of-state distilleries don’t have, New York has created an unfair trade barrier, violating the Constitution’s Commerce Clause.”

The Pacific Legal Foundation has a history of representing alcohol producers in court; recent cases have included a federal lawsuit regarding Pennsylvania’s regulations on breweries and a state lawsuit focused on entertainment restrictions at Alaskan breweries.

“It is true that California’s law is discriminatory too. But just because California has a discriminatory law doesn’t mean that New York is allowed to discriminate against businesses in California,” the Pacific Legal Foundation writes in a recent blog post describing the case. “It is unjust to burden hardworking entrepreneurs with additional, onerous hurdles that limit market access and economic opportunity to businesses located out of state. New York has created an unfair trade barrier, violating the Constitution’s Commerce Clause.”

The lawsuit seeks the following relief on behalf of the plaintiff: 

A. A declaratory judgment that N.Y. Alco. Bev. Cont. Law § 68, on its face and as applied to Plaintiff, violates the Interstate Commerce Clause of the Constitution insofar as it bans out-of-state distilleries from shipping to New York consumers unless the out-of-state distillery’s home state offers reciprocity to New York distilleries;
B. A permanent injunction against Defendants, their officers, their employees, agents, assigns, and all persons acting in concert with them, directing them to stop enforcing N.Y. Alco. Bev. Cont. Law § 68’s reciprocity requirement;
C. Attorney fees and costs pursuant to 42 U.S.C. § 1988; and
D. Any further legal or equitable relief that this Court may deem just and proper.

It remains to be seen if this recent suit will hold up in court — and if it could create a new precedent for regulations surrounding interstate liquor shipping.