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Texas Craft Brewers Sue for Freedom from Distributors

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AUSTIN, Texas — During its last session nearly two years ago, the Texas Legislature passed groundbreaking reforms to allow the state’s craft breweries greater freedom to operate. But thanks to a little-noticed provision slipped into the bill, that freedom may soon hit a roadblock.

Ever since the repeal of Prohibition, Texas law has required a separation between producers, distributors and retailers of alcoholic beverages. Under this so-called “three-tier” system, breweries over a given size must contract with a distribution company to sell their booze to retailers.

The 2013 reforms prohibit alcohol manufacturers from receiving compensation from distributors as inducement for a territorial distribution agreement. That’s significant, because Texas law requires distribution agreements to be both geographically exclusive (for example, a given brewer can only distribute through a single distributor in Houston) as well as irrevocable.

These features of distribution contracts make them potentially very valuable to distributors. In fact, distributors have themselves been known to sell distribution rights to third-parties, which conveniently is not prohibited under Texas law. All of this means that, to distribute their products, breweries are required to give away a valuable property right for free.

The law does allow small brewers to self-distribute if they wish. However, should a small brewery decide to distribute its products through a third party, it must have the same sorts of exclusivity agreements as those that bound the larger beermakers.

Given the costs of self-distribution, both large and small brewers are hampered by this anti-competitive provision of the law. Some small-scale brewers have gotten so fed up with this unfairness that they’ve decided to settle it the American way: in court. On Dec. 10, three craft breweries (Live Oak Brewing in East Austin, and Revolver and Peticolas Brewing in the DFW area) filed suit challenging the constitutionality of the prohibition. The lawsuit claims both that the prohibition on payment to manufacturers represents a taking of property and that the law generally infringes on plaintiffs’ economic liberties.

The Institute for Justice is representing the craft brewers in the case. IJ has made a name for itself challenging nonsensical regulations on economic liberty grounds. The group currently has a case before the Texas Supreme Court challenging burdensome restrictions on hair-braiding, and was successful recently in a challenge brought by monks to a Louisiana law licensing casket-makers.

Texas’ regulatory framework for alcohol is structured around an industry as it exited 70 years ago. The growth in craft brewing is only one way that, as in many other areas, changes in business and technology are increasingly rendering these laws obsolete. Regardless of what happens with the current lawsuit, Texas lawmakers will have to address this matter.

Josiah Neeley is the Texas State Director for the R Street Institute. Follow him on Twitter @jneeley78.


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