AUSTIN, Texas (CN) - Texas alcohol regulators unconstitutionally force craft brewers to give away their territorial rights to distributors for free, three beer brewers claim in court.
Live Oak Brewing Company, Revolver Brewing, and Peticolas Brewing Co. sued the Texas Alcoholic Beverage Commission on Dec. 10 in Travis County Court, alleging violations of the Texas Constitution.
Definitions of craft breweries vary, but they produce less beer than mass market breweries. Live Oak describes craft beer as "full-flavored beer, brewed using simple ingredients without artificial additives, with direct involvement by the brewery's owners." There are more than 20 full-time craft breweries in Texas, and dozens of brewpubs.
"A growing number of consumers prefer craft beer to mass-market beer.
The reasons for this vary, but include: craft beer is more flavorful and complex; craft beer is often brewed using traditional brewing methods and without artificial additives; craft beer is brewed with the involvement and oversight of the individuals who own the brewery, which ensures higher quality; and craft beer is available in a striking array of styles and flavors," Live Oak says in the complaint.
Beer production in Texas is a three-tier system, consisting of brewers, distributors, and retailers. Each branch must be independent from the other branches.
Distributors take the beer from the breweries to bars, restaurants, grocers and liquor stores, which sell it to the consumer.
Brewers must use a single exclusive distributor within each particular territory to distribute a particular beer.
The TABC requires brewers that make more than 125,000 barrels of beer per year to use distributors, but while beer brewers who make less than 125,000 barrels per year are allowed to self-distribute or use a distributor.
The dispute that is the subject of the lawsuit arose in 2013, after the Legislature passed Senate Bill 639, also referred to as the "Sale Restriction."
The law stops the prior practice of brewers selling their territorial rights on the open market to distributors. The brewer now must give the distributor those rights for free. But distributors who receive territorial rights for free can resell them to other distributors for a profit. And a brewer would have to repurchase its territorial rights from the distributor that got those rights for free (if the distributor agrees to the repurchase). The TABC is responsible for enforcing this law.
"The burden of the Sale Restriction falls squarely on craft brewers, the benefit squarely with distributors," the complaint states. "What brewers previously sold for compensation, they are now required to give away. ... The effect of this law is not only to deny craft brewers an important property right in part of their business, but also to make it more difficult and more expensive for craft brewers to expand their businesses. Previously, brewers who negotiated for the sale of their territorial rights could take that money and reinvest it in additional staff and equipment, thus growing their breweries and allowing them to provide beer to other parts of the state."
The craft brewers claim that the law denies them property rights and restricts their economic liberty: "their ability to earn an honest living free from unreasonable governmental interference."
The craft brewers claim the Sale Restriction has slowed their plans for growth into other parts of the state, caused them to hire fewer employees and to buy less equipment than they would have otherwise. They face the threat of losing their alcohol manufacturer's licenses and other permits if they accept compensation for their territorial rights to distribute beer in other parts of Texas.
Michael Peticolas, of Peticolas Brewing Co., told Courthouse News: "The sales restriction hinders the growth of Texas brewers. It literally strips brewers of the value of the brand they have built."
The TABC would not comment on pending litigation.
The plaintiffs seek an injunction stopping the TABC's enforcement of the Sale Restriction: Texas Alcoholic Beverage Code § 102.75(a)(7).
They also seek declaratory judgment that the TABC is violating the Takings Clause and the due process guarantee of the Texas Constitution.
They also seek $1 in damages, plus costs.
They are represented by Matthew R. Miller with the Institute for Justice, in Austin.
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