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Texas Alcoholic Beverage Commission v. Live Oak Brewing Co., LLC

Court of Appeals of Texas, Third District, Austin

December 15, 2017

Texas Alcoholic Beverage Commission and Adrian Bentley Nettles, in his official capacity as Executive Director of the Texas Alcoholic Beverage Commission, Appellants
Live Oak Brewing Co., LLC; Revolver Brewing, LLC; and Peticolas Brewing Co., LLC, Appellees


          Before Chief Justice Rose, Justices Pemberton and Goodwin


          Melissa Goodwin, Justice

         The Texas Alcohol Beverage Commission and its Executive Director[1] (collectively the Commission) appeal from the trial court's final judgment declaring that "Section 102.75(a)(7) of the Texas Alcoholic Beverage Code violates the Due Course of Law guarantees of article I, section 19 of the Texas Constitution" and permanently enjoining the Commission from enforcing the statute against appellees Live Oak Brewing Co., LLC; Revolver Brewing, LLC; Peticolas Brewing Co., LLC; "and all other producers of beer, ale, and malt liquor." For the following reasons, we reverse the trial court's final judgment and render judgment in favor of the Commission.


         The Three-Tier System and the Beer Industry Fair Dealing Law

         The alcoholic beverage industry in the State of Texas is regulated pursuant to a three-tier system that maintains "strict separation between the manufacturing, wholesaling, and retailing levels of the industry." See Tex. Alco. Bev. Code § 6.03 (describing history behind framework for distribution of alcoholic beverage products after Prohibition). Generally speaking, manufacturers of alcoholic beverages sell their product to distributors, distributors then sell the product within designated territories to retailers, and retailers then sell the product to the end consumer. Under this system, the members of the different tiers must remain independent from members of the other tiers, with the distributors acting as the middle-person in the alcoholic beverage supply chain. See id. § 102.01 (listing prohibited conduct between tiers).

         The "public policy of this state" is "to maintain and enforce the three-tier system" and "thereby to prevent the creation or maintenance of a 'tied house.'" Id. § 6.03; see id. §§ 1.03 (stating that Texas Alcoholic Beverage Code is "exercise of the police power of this state for the protection of the welfare, health, peace, temperance, and safety of the people of this state"), 6.03 (explaining that one purpose of framework is to prevent organized crime). A "tied house" for these purposes means "any overlapping ownership or other prohibited relationship between those engaged in the alcoholic beverage industry at different levels." Id. § 102.01; Cadena Comercial USA Corp. v. Texas Alcoholic Beverage Comm'n, 518 S.W.3d 318, 321-22 (Tex. 2017) (explaining that "catalyst for the tied house provisions was a fear of returning to the state of affairs before Prohibition when tied houses played what was thought to be a substantial role in over-intoxicating society" and that "provisions are designed to prevent certain overlapping relationships between those engaged in the alcoholic beverage industry at different levels, or tiers"); Neel v. Texas Liquor Control Bd., 259 S.W.2d 312, 316 (Tex. Civ. App.-Austin 1953, writ ref'd n.r.e.) (recognizing Texas Legislature's express determination that "liquor traffic in this State would be best controlled by keeping the various levels of the liquor industry independent of each other").

         In addition to general provisions applying to the alcoholic beverage industry, specific provisions address the beer industry. Relevant to this appeal, holders of beer manufacturer licenses generally are required to "designate territorial limits in this state within which the brands of beer the licensee manufacturers may be sold by general, local, or branch distributor's licensees." Tex. Alco. Bev. Code § 102.51(a). The manufacturer and distributor must enter into a written agreement "setting forth the sales territory within which each brand of beer purchased by that distributor may be distributed and sold, " and a "manufacturer may not assign all or any part of the same sales territory to more than one distributor." Id. § 102.51(b). Once a distributor has been assigned a sales territory for a manufacturer's brand of beer, the distributor is required to maintain sufficient employees, storage facilities, delivery vehicles, and inventory to satisfy "the reasonable needs of all retailers in the assigned territory." Id. § 102.54. The stated purposes for these provisions concerning the distribution territorial limits on the sales of beer are "to promote the public interest in the fair, efficient, and competitive distribution of beer, to increase competition in such areas, and to assure product quality control and accountability." Id. § 102.51(c).

         The beer industry in Texas is also subject to the "Beer Industry Fair Dealing Law" (the Fair Dealing Law). See id. §§ 102.71-.82. The stated purpose of the Fair Dealing Law is "to promote the public's interest in the fair, efficient, and competitive distribution of beer within this state by requiring manufacturers and distributors to conduct their business relations so as to assure: (1) that the beer distributor is free to manage its business enterprise, including the right to independently establish its selling price; and (2) the public, retailers, and manufacturers are served by distributors who will devote their reasonable efforts and resource to the sales and distribution of all of the manufacturer's products which the distributor has the right to sell and distribute and maintain satisfactory sales levels in the sales territory assigned the distributor." Id. § 102.72(a).

         Among the Fair Dealing Law's provisions, a party to a distribution agreement between a manufacturer and distributor cannot cancel the agreement except with notice and for "good cause." Id. § 102.74. Once obtained, a distributor can sell assigned territorial rights from a manufacturer to another distributor, and the manufacturer cannot "unreasonably withhold or delay its approval" of the assignment. Id. § 102.76. A manufacturer also cannot:

(1) induce or coerce, or attempt to induce or coerce, any distributor to engage in any illegal act or course of conduct;
(2) require a distributor to assent to any unreasonable requirement, condition, understanding, or term of an agreement prohibiting a distributor from selling the product of any other manufacturer or manufacturers;
(3) fix or maintain the price at which a distributor may resell beer;
(4) fail to provide to each distributor of its brands a written contract which embodies the manufacturer's agreement with its distributor;
(5) require any distributor to accept delivery of any beer or any other item or commodity which shall not have been ordered by the distributor;
(6) adjust the price at which the manufacturer sells beer to a distributor based on the price at which a distributor resells beer to a retailer, but a manufacturer is free to set its own price so long as any price adjustment is based on factors other than a distributor's increase in the price it charges to a retailer and not intended to otherwise coerce illegal behavior under this section; or
(7) accept payment in exchange for an agreement setting forth territorial rights.

Id. § 102.75.

         Section 102.75(a)(7)-the challenged statute here-was enacted in 2013 as part of a legislative package that addressed the craft beer brewing industry. See Act of May 20, 2013, 83d Leg., R.S., ch. 555, 2013 Tex. Gen. Laws 1494, 1494-95; see also Acts of May 20, 2013, 83d Leg., R.S., chs. 533-535, 2013 Tex. Gen. Laws 1443, 1443-1448. After expressly recognizing that "the three-tier system of regulating the alcoholic beverage industry is unquestionably legitimate, " the Texas Legislature found that "the state is authorized to promote, market, and educate consumers about the emerging small brewing industry" and that "it is in the state's ...

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