Craft-Brewers Sue State of Texas Over Distributing Rights
May 18, 2015
Attorney-turned-brewer Michael Peticolas was negotiating with a major distributor to sell his beer, and then Texas got in the way. If you’re not a brewer, you likely don’t know how challenging it can be to lock down a distributor in the early phase of your business. Even more challenging, is the reality of the “Three-Tier System” and how if affects new brewers.
The Three-Tier System was created to help keep organized crime out of the alcohol industry. Not suprisingly, during the 13 years that alcohol was illegal, organized crime had a heyday selling it anyway. To curb impropriety, price-fixing, and other various corrupt practices, the federal government created the concept to create boundaries within the industry. This meant that alcohol sales had to be processed and taxed through three stages: 1) Manufacturers, 2) Distributors, and 3) Retailers. The cardinal rule of the Three-Tier System is that no entity may own more than one stage of the process. However, keep in mind that there are substantial deviations between states in how they treat the Three Tier System, so you will often see the general concept bending from state to state.
The bottom-line is that the system creates a lot of issues for new micro-brewers who want their distributor to market their brand as if it was their own. Bargaining power is critical, and it is very important to find a distributor who believes in your brand as much as you do. This is often very challenging in the early stages of a brewery.
In Texas, Peticolas was negotiating a deal with a major distributor in the state. Until 2013, Texas’s Three-Tier System did not prohibit brewers from selling their distributing rights. That is, if you made a very popular beer that XYZ Distributing Co wanted distributing rights to, they could pay you for the rights to sell your beer to bars and retailers throughout the state. Texas eventually changed the rule to prohibit the practice of selling distributing rights. As a result, Peticolas and multiple other craft brewers filed suit against the State of Texas, arguing that the law amounted to an unlawful “taking”, pursuant to the Texas State Constitution. You can read the full complaint here.
Although the future of craft-brewery distributing rights is unclear, one thing is for certain – states are playing with the Three Tiered System in new ways and the regulatory minefield won’t stop changing anytime soon.