Peticolas and Other Craft Brewers Are Suing Texas Over Distribution Laws
Is the state of Texas standing in the way of craft breweries? Michael Peticolas thinks so.
The craft brewery explosion across the country is the unlikeliest of events, especially in Texas. Ten years ago, no one would have thought that the entire state of Texas -- least of all Dallas-Fort Worth -- would be home to some of the country's finest craft brewers, but here we are. Unfortunately, the Texas Legislature decided to strangle the growth of these up-and-coming small businesses with a provision in SB 639, known as the "Sale Restriction."
The Texas Alcoholic Beverage Commission governs the sale of booze in Texas with a pretty complicated set of laws, defined as the "three-tier" system. In this system, businesses that are involved in the production of beer are divided into three tiers: brewers, distributors and retailers. State law further stipulates that these three types of entities are legally required to remain separate.
But, of course, these companies still have to seamlessly work together to keep us all drunk. Brewers, who produce more than 125,000 barrels of beer per year, are legally required to work with a distributor for delivery of that beer. In order to get it from brewery to bar, craft beer producers grant distribution rights to companies like Andrews Distributing and Ben E. Keith.
In Texas, these agreements give the distributor exclusive and perpetual rights to sell the beer in a given territory, like a city or county. Before the passage of the Sale Restriction, these territorial distribution rights were worth big bucks. After the bill became law, brewers were no longer allowed to "accept payment or bear any costs in exchange for territorial assignment of a brand to a distributor." In non-legalese, Texas state law now requires breweries to give away lifetime distribution rights to their beers for free. This, unsurprisingly, did not sit well with Texas breweries, including Dallas' own Peticolas Brewing Company.
Along with Austin's Live Oak Brewing and Fort Worth's Revolver Brewing, Peticolas is now asking a court to declare the provision unconstitutional. In a lawsuit filed today in the Travis County district court, the plaintiffs argue that the Sale Restriction is a patent violation of their property rights as business owners. "The effect of this law is not only to deny craft brewers an important property right in part of their business," reads the complaint, "but also to make it more difficult and more expensive for craft brewers to expand their businesses."
"Brewers used to use the funds from distribution rights to reinvest in their breweries," says Matt Miller, attorney for the plaintiffs. "It was a model of growth for craft breweries." The complaint goes on to allege that the Sale Restriction is "stifling the Texas craft beer renaissance," and in turn, screwing breweries out of what is potentially millions of dollars. "Exclusivity makes these rights valuable - they are worth a lot of money," says Miller.
To add insult to injury, brewers are the only party in the transaction that aren't allowed to profit from the sale of distribution rights to their beer. Once a distributor has acquired this right, they are free to sell it to another distributor at whatever price, which probably has something to do with why the Wholesale Beer Distributors of Texas offered the only on-record public support of the bill. Even worse, if a brewer breaks their contract with a distributor, they are required to financially compensate the distributor for the value of their own brand.
Peticolas, Live Oak, and Revolver approached the Institute For Justice, a non-profit, libertarian civil rights law firm, for assistance in fighting the law. Going head-to-head with the state of Texas is expensive, and even with their forces combined, it's unrealistic that the three upstart breweries would have been able to financially support the suit. "When we first saw the case, we had to do a lot of research because the whole thing seemed unbelievable to us," says Miller. "This is a pretty clear violation of the Texas Constitution. You can't force a business to give away part of their business to someone else, especially when they didn't earn and don't deserve it."
It's this point that made suing the state a no-brainer for Michael Peticolas, owner of Peticolas Brewing. "I thought we should be expanding on Texas craft brewers' rights, and I was shocked to see them being contracted," he says. Peticolas, himself a practicing attorney, feels that the law "flies in the face of the free market." "You're telling a willing brewer and willing distributor who may be willing to pay for these rights that they can't. I don't think that the state has any interest in keeping Brewer A and Distributor B from doing business."
According to Peticolas, the law largely affects smaller breweries who haven't yet signed distribution agreements, and it's a hot topic in the brewing community. Peticolas has written several blogs about the issue for his brewery's website, and he's not alone. Austin's Jester King Brewing and San Antonio's Freetail Brewing have also been vocal in their opposition to the Sale Restriction.
The complaint, set to be filed today, is an interesting test of Texas' long reputation for being pro-business. We'll see whether the State will protect the interests of big business or those of small, up-and-coming breweries. Miller and Peticolas both seemed relatively confident that the court would rule in their favor, but we'll keep you posted on the details as the case progresses.
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