State Sued for "Stifling the Texas Craft Beer Renaissance"

Three Texas breweries filed a lawsuit against the state on Wednesday seeking to to overturn a 2013 law they say violates the Texas Constitution by forcing them to give away their territorial distribution rights for free.

In their complaint, filed in state district court in Austin, the heads of Live Oak Brewing in Austin, Peticolas Brewing Company in Dallas and Revolver Brewing in Granbury say that were it not for Senate Bill 639, they would be expanding. Instead, their plans to bring their beer to new markets around the state have been put on hold. 

In the suit, they accuse the law of "stifling the Texas craft beer renaissance."

"This law is like the government forcing authors to give the rights to their books to publishers for free," said Matt Miller, managing attorney of the Texas office of the Institute for Justice, a Virginia-based law firm representing the brewers. "It is unconstitutional for Texas to force brewers to give distributors property that they never earned and don't deserve."

The law says that brewers may not accept payment for the right to deliver beer in certain areas. Supporters said it would "protect the independence of distributors," according to an analysis of the bill by the House Research Organization.

The Texas Alcoholic Beverage Commission and its leaders are the defendants in the suit. On Wednesday, a spokeswoman for the TABC declined to comment on pending litigation.

There are three "tiers" in the alcoholic beverage industry: brewers who make the beer, retailers who sell it, and distributors who pick it up from the former and bring it to the latter.

Prior to 2013, craft brewers could negotiate payment from distributors for the exclusive rights to deliver their beverages in a certain area. But the law, authored by state Sen. John Carona, R-Dallas, prohibited the sale of these territorial rights.

Carona was not immediately available for comment on Wednesday. He told the Dallas Observer in 2013: "What happens when the large manufacturers decide to require payment from a distributor for the right to distribute their brand? We could be back where we started from, with those who won't pay to play getting muscled out of the marketplace." 

Distributors are not prohibited from selling territorial rights that they have acquired to another distributor. The craft brewers' complaint says, "A distributor is thus able to receive territorial rights for free and re-sell them for a profit."

This strikes the brewers at Live Oak, Peticolas and Revolver as unfair — and in violation of the state's constitution, which says that a person's property can not be taken without consent unless it is for use by the public or an entity granted the power of eminent domain. Miller said it was likely that other craft breweries will join the lawsuit.

These territorial rights are "a valuable piece of property" that brewers should be able to sell in order to generate revenue for the growth and expansion of their companies, the lawsuit says.

"I'm proud to have been a part of the Texas craft beer renaissance," Chip McElroy, president of Live Oak Brewing, said in a statement. "When Texas passed this law, not only did it give away part of what my employees and I built — it took my beer off the shelves in Dallas-Fort Worth, San Antonio and other parts of Texas where Live Oak beer would otherwise be available."

According to the complaint, McElroy has existing agreements to distribute his beer in Houston. However, he is unwilling to give away his territorial rights for free, and so has not entered into any new agreements. He intends to self-distribute — which he can do because the company produces fewer than 125,000 barrels of beer annually — until his operation reaches a production level where that is no longer legally allowed.