Knowledgebase-Retail Liquor Licenses Certificate of Compliance Determined by Lottery or Drawing


Information Product

Title:Retail Liquor Licenses Certificate of Compliance Determined by Lottery or Drawing
Summary:MTAS was asked whether, under the state law governing retail liquor licenses, a city can use a lottery or drawing to determine who receives a certificate of compliance.
Original Author:Hemsley, Sid
Co-Author:
Product Create Date:01/15/2009
Last Reviewed on::06/20/2017
Subject:Alcoholic beverages; Licenses and permits
Type:Legal Opinion
Legal Opinion: Retail Liquor Licenses public.doc

Reference Documents:

Text of Document: MEMORANDUM




FROM: Sid Hemsley, Senior Law Consultant

DATE: January 15, 2009

RE: Retail Liquor Licenses


Your question is whether the city's issuance of a certificate of compliance to applicants for retail liquor license issued by the ABC can be decided by a drawing or lottery. That question is generated by the fact that a referendum in the city recently authorized the sale of retail liquor sales, and the city has established a limit on the number of retail liquor licenses, as it has the right to do under Tennessee Code Annotated, ' 57-3-204. The number of applicants for certificates of compliance from the city exceed the number of retail liquor licenses that can be issued.

The Tennessee statutes that govern the issuance of retail liquor licenses do not provide that a city can pick and choose from among the applicants for certificates of compliance who meet the qualifications for such certificates, through the use of a lottery or drawing. None of the cases that interpret and apply those statutes involve the question of whether a lottery or drawing can be used for that purpose. The only exception I could find in the United States was in Florida where a state statute provides for the resolution of which applicants are entitled to a liquor license by lottery or drawing.

However, in my opinion it is doubtful that a city can use that method to pick and choose among applicants for certificates of convenience in Tennessee (although I have been told that it has been done that way at least once).

Under Tennessee Code Annotated, Title 57, Chapter 3, the ABC issues liquor licenses; the only part the city plays in the issuance of such licenses is the issuance of certificates of compliance to applicants for such licenses [Tennessee Code Annotated, ' 57-3-208]. It is possible that the applicants for certificates of compliance who qualify for such certificates may exceed the limit on the number of ABC licenses authorized to be issued in the city.

There follows below the limits of what a municipality can prescribe with respect to regulations a city can impose on an applicant for a certificate of compliance under Tennessee Code Annotated, ' 57-3-208:

(b) The certificate must state:
(1) That the applicant or applicants who are to be in actual charge of the business have not been convicted of a felony within a ten-year period immediately preceding the date of application and, if a corporation, that the executive officers or those in control have not been convicted of a felony within a ten-year period immediately preceding the date of the application; and further, that in the official's opinion the applicant will not violate any of the provisions of this chapter.
(2) That the applicant or applicants have secured a location for the business which complies with all restrictions of any local law, ordinance, or resolution duly adopted by the local authorities regulating the number of retail licenses to be issued within the jurisdiction.
(3) Municipalities and counties are hereby authorized to limit the location of retail liquor stores and the number of licenses issued within their jurisdictions. No local law, ordinance or resolution may limit the location and number of licenses issued under ' 57-3-204, so as to unreasonably restrict the availability of alcoholic beverages for the residents of such municipalities and counties. A local jurisdiction may impose reasonable residence requirements on any applicant. However, if a local jurisdiction does impose such residency requirements, such local jurisdiction shall not be authorized to impose any residency requirement on any applicant who has been continuously licensed pursuant to ' 57-3-204 for seven (7) consecutive years.

The standard for determining whether a certificate of compliance has been illegally denied by a municipality is whether the denial is unreasonable, arbitrary and capricious. [See City of Chattanooga v. Tennessee Alcoholic Beverage Commission, 525 S.W.2d 470 (Tenn. 1975); Templeton v. Metropolitan Government of Nashville and Davidson County, 650 S.W.2d 743 (Tenn. 1983); SPE, Inc. v. Metropolitan Government of Nashville and Davidson County, 817 S.W.2d 330 (Tenn. Ct. App. 1991). Also see the unreported case of CBM Package Liquor, Inc. v. City of Maryville, 2004 WL 1459396 (Tenn. Ct. App. 2004).]

The question of what constitutes an arbitrary decision is addressed in SPE, Inc., above: "An arbitrary decision is one that is based alone on one's will and not upon any cause of reasoning or exercise of judgement. State ex rel. Nixon v. McCanless, 176 Tenn. 358, 141 S.W.2d 887 (1940)." Other cases have defined the words "arbitrary" and "capricious."
In Jackson Mobilephone Company, Inc. v. Tennessee Public Service Commission , 876 S.W.2d 106 (Tenn. Ct. App. 1994), declares that:

....Agency decisions not supported by substantial and material evidence are arbitrary and capricious. C.F. Indus., Inc. v. Tennessee Public Service Commission, 599 S.W.2d 536, 540 (Tenn. 1980); Pace v. Garbage Disposal Dist. of Washington County, 54 Tenn. App. 263, 266, 390 S.W.2d 461. 463 (1965). However, agency decisions with adequate evidentiary support may still be arbitrary and capricious if caused by clear error in judgement. Bowman Transp. Inc., v. Arkansas Best Freight Sys., Inc., 419 U.S. 281, 284, 95 S.Ct.438. 441-42. 42 L.Ed.2d 447 (1974); Girard v. City of Glen Falls, 173 A.D.2d 113, 577 N.Y.S.2d 496, 499 (1991); 5 Kenneth C. Davis, Administrative Law Treatise ' 29:7, at 358 (2d ed. 1984)....

....An arbitrary decision is one that is not based on any course of reasoning or exercise of judgment, State ex rel. Nixon v. McCanless, 176 Tenn.352, 354, 141 S.W.2d 885, 886 (1940), or one that disregards the facts or circumstances of the case without some basis that would lead a reasonable person to reach the same conclusion. Wagner v. City of Omaha, 236 Neb. 843, 464 N.W.2d 175, 1890 (1991); Ramsey v. Department of Human Servs., 301 Ark. 285, 783 S.W.2d 361, 364 (1990).

.... [T]he court should review the record carefully to determine whether the administrative agency's decision is supported by "such relevant evidence as a rational mind might accept to support a rational conclusion. " Clay County Manor v. State Dept. Health & Environment, 849 S.W.2d 755, 759 (Tenn.1993); Southern Ry. v. State Bd. Equalization, 682 S.W.2d 196, 199 (Tenn. 1984). The court need not reweigh the evidence, Humana of Tennessee v. Tennessee Health Facilities Commission, 551 S.W.2d 664, 667 (Tenn. 1977), and the agency's decision need not be supported by a preponderance of the evidence. Street v. State Bd. of Equalization, 812 S.W.2d 583, 585 (Tenn. App. 1990). The evidence will be sufficient if it furnishes a reasonably sound factual basis for the decision being reviewed. Wayne County v. Tennessee Solid Waste Disposal Control Bd., 756 S.W.2d 274, 279 (Tenn. App. 1988). [At 110-111]


The recent case of Leonard Plating Company v. Metropolitan Government of Nashville and Davidson County, 213 S.W.3d 898 (Tenn. Ct. App 2006), appeal denied by Tennessee Supreme Court, Dec. 27, 2006, the Court, in discussing the scope of review of administrative agencies, said:

Review under common-law writ of certiorari does not extend to a redetermination of the facts found by the board or agency whose decision is being reviewed. Tennessee Waste Movers, Inc. v. Loudon County, 160 S.W.3d 517, 521 n.2 (Tenn. 2005); Cooper v. Williamson County Bd. of Educ., 746 S.W.2d 176, 179 (Tenn. 1987). The courts may not (1) inquire into the intrinsic correctness of the decision, (2) reweigh the evidence, or (3) substitute their judgment for that of the board or agency. However, they may review the record solely to determine whether it contains any material evidence to support the decision because a decision without evidentiary support is an arbitrary one. Watts v. Civil Serv. Bd. For Columbia, 606 S.W.2d at 276-77; Lewis v. Bedford County Bd. of Zoning App., 174 S.W.3d at 246, Lafferty v. City of Winchester, 46 S.W.3d at 759; Sexton v. Anderson County, 57 S.W.2d 663, 667 (Tenn. Ct. App. 1979) [At 903] [Emphasis is mine.]

It seems clear from the definition of what constitutes an "arbitrary and capricious" decision that a lottery or drawing will not qualify as a decision-making mechanism for determining which applicants for a certificate of compliance are entitled to the certificates. To avoid the "arbitrary and capricious" label, the city's decision is required to involve a "course of reasoning and judgement," must be supported by such relevant evidence as a rational mind might accept to support a rational conclusion, and must not be one "that disregards the facts or circumstances of the case without some basis that would lead a reasonable person to reach the same conclusion." As Leonard Plating, above, so succinctly says, "...a decision without evidentiary support is an arbitrary one. "

It is difficult to see how a lottery or drawing to select successful applicants for certificates of compliance would involve such decisions. A lottery or drawing is plainly based totally upon chance or luck; no judgement is involved in the decision it produces, and the decision produces no evidence that a court can review.

There is another problem with selecting applicants for certificates of compliance by lottery or drawing: Tennessee Code Annotated, ' 57-3-208(c) provides that "No local law, ordinance or resolution may limit the location and number of licenses authorized under ' 57-3- 204, so as to unreasonably restrict the availability of alcoholic beverages for the residents of such municipalities and counties." It is conceivable that the ward of certificates of compliance by lottery or drawing can result in the awards being made to applicants all within a tight geographic range. It can be argued that such a selection would not have been the function of the local law, ordinance or resolution, but of the lottery or drawing, but I am not sure a court would cut so finely.

Please remember that these legal opinions were written based on the facts of a given city at a certain time. The laws referenced in any opinion may have changed or may not be applicable to your city or circumstances.

Always consult with your city attorney or an MTAS consultant before taking any action based on information contained in this database.